The latest move by the government to further digitise corporate book-keeping has been criticised by small businesses as yet another step towards increasing their compliance burden. The regulatory burden still remains substantial, seven years after the Narendra Modi-government came to power with a promise of improving ease of doing business, experts say.
A notification issued by the Corporate Affairs Ministry on March 24 has mandated that beginning April 1, companies will have to compulsorily maintain audit trails and transaction logs of every financial transaction in their accounting software. Both industry and tax experts say the move may prove detrimental for small firms who are already struggling to comply with Goods and Services Tax norms.
“We appreciate the steps that the government is taking to improve the system but this move will have a large impact on the small and medium-sized companies and it should not be an issue for the larger companies. It will create friction in the ease of doing business for the smaller enterprises,” Sanjay Aggarwal, President of the PHD Chamber of Commerce and Industry, said.
At a time when many enterprises are still reeling from the losses inflicted by the COVID-19 pandemic while juggling GST compliances, instituting such rule changes at such a short notice will create a fear among the smaller companies and the move may become counterproductive, he warned.
Arguing that small companies cannot afford expensive software, Aggarwal said he would petition the government to instead institute a turnover limit, exempting small businesses. His sentiments were echoed by other industry bodies representing Micro, Small and Medium enterprises. Sources at multiple national chambers such as Ficci and the Confederation of Indian Industry said they will bring up the matter at meetings with the government soon.
As per the MCA notification under the Companies (Accounts) Amendment Rules 2021, "every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled."
The requirement of audit trail feature from April 1, 2021, comes at the year-end which will certainly eliminate the scope of adjustment entries and will have a bearing even on FY21, pointed out Aditya Singhania, Founder of Singhania's GST Consultancy & Co.
"Though many large taxpayers already have such a mechanism, the majority of the companies having accounting software needs to ensure by upgrading their system having the Audit Trail right from April 1, 2021. Since the dependency is on software companies providing accounting software or on in-house IT teams, a gestation period of at least a month or two would have been ideal as any implementation in the accounting software needs to go through various stages," Singhania said.
The latest move is in step with other norms brought in by the government. Case in point, the implementation of the e-invoicing system in GST, implemented earlier, intends to capture the transaction right from the issuance of tax invoice as against the erstwhile methodology of reporting the details of invoices at the month or quarter-end in its statutory returns.
"In fact, any amendment to the e-invoice in the GST system at government end does have the feature of audit trail. It appears the department would rely more on these audit trails to ascertain the changes made in the entries and identify the fundamentals involved therein," Singhania added.
“Tally for example does not have an audit trail, so one has the provision to go back and edit the transaction. However, now with the incoming rule, it will reflect in the software if any transaction is changed or cancelled,” L Badri Narayanan, Executive Partner at Lakshmikumaran & Sridharan Attorneys, said.
Unlike earlier, the companies will now have to issue a credit note even if it is a normal mistake like a wrong number or wrong name in any financial transaction, Narayan noted. "So it will increase the overall compliance burden for mid-sized companies and the day-to-day accounting will become slower. Big companies already have in place such software which captures the audit trail so they are not likely to be impacted much," he added.