Annual Information Statement (AIS) - Extended version of From 26AS

 The Income Tax Department has recently introduced the new Annual Information Statement (AIS) on the Compliance Portal, which furnishes comprehensive information to a taxpayer for a particular financial year. It includes information about taxpayers’ incomes, financial transactions, tax details, Income Tax proceedings, etc. It also accepts feedback from the assessees on the information shown in the AIS.

AIS displays both reported value (value reported by the reporting entities) as well as modified value (i.e., the value after considering the assessee’s feedback) for each kind of information, i.e., SFT, TDS, etc.

Objectives of the AIS

The objectives of introducing the AIS are:

• Showing complete information to the assessee with a facility to provide online feedback.

• Encouraging voluntary compliance and facilitating seamless prefilling of return.

• Preventing non-compliance.

Salient characteristics of the AIS

The characteristics of the AIS are:

• It contains information regarding dividends, interest, securities transactions, foreign remittance information, mutual fund transactions, etc.

• Summary of AIS information is displayed in the Taxpayer Information Summary (TIS) for ease of filing returns ( prefilling will be enabled in a phased manner).

• Assessees will be able to submit online feedback on the information displayed in the AIS’s and download information in PDF, CSV and JSON file formats.

• AIS Utility will enable taxpayers to view the AIS and upload feedback offline.

The information displayed in the AIS

In the AIS, the information is displayed in Part A and Part B.

PART A

It shows general information such as PAN, name, Aadhaar number, date of birth/incorporation/formation, contact details of the assessee, etc. 

PARTB

• Information relating to TDS and TCS;

• Information relating to Specified Financial Transactions (SFT);

• Information relating to the payment of taxes such as advance tax and self-assessment tax;

• Information relating to the demand raised and refund initiated during a financial year;

• Information relating to pending proceedings and completed proceedings;

• Other information such as interest on refund, outward foreign remittance/purchase of foreign currency, etc.

For example, for interest earned on the savings bank account - account number, account type, source code, account status, the aggregate amount of interest from the savings account from the said source is shown.

Procedure to check the AIS

The steps to check the AIS online are as follows:

Step 1: Log in at the Income Tax e-filing website at https://www.incometax.gov.in.

Step 2: After login, go to Services > Annual Information Statement (AIS).

Step 3: Click on the ‘Proceed’ button.

Step 4: It will take you to the compliance portal. You can view the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) on the AIS home page.

Step 5: You can download the AIS and TIS by clicking on the download icon in the respective tiles. The AIS can be downloaded in PDF or JSON formats, whereas the TIS can be downloaded in PDF format.

If you download the PDF file, it will be password protected. To unlock it, enter the password as a combination of PAN (in upper case) and date of birth in case of an individual assessee or date of incorporation/formation in case of a non-individual assessee in the format DDMMYYYY without any space.

For example, if an assessee has PAN, AAAAA9876Z and the date of birth is 31^stMarch 1985, his password will be AAAAA9876Z31031985.

Procedure for submitting online feedback on AIS Information

The steps to submit online feedback on the AIS informationare as follows:

Step 1: Log in at the Income Tax e-filing portal and access the Annual Information Statement.

Step 2: On accessing the AIS, the assessee will find the complete information for the chosen financial year under Part B of the statement in the following sections:

• TDS/TCS Information;

• SFT Information;

• Payment of Taxes;

• Demand and Refund;

• Other Information

Step 3: Click on the appropriate tab to see the information source-wise.

Step 4: An assessee can expand the source-wise information by clicking on the left-hand icon to see transaction-wise information.

Step 5: Choose the “Optional” tab in the feedback column to provide feedback on the concerned transaction. An assessee can also give feedback on multiple transactions in bulk.

An assessee can select the following types of feedback:

• Information is correct

• Information is not completely correct

• Information relates to other PAN/Year

• Information is duplicate /included in other information

• Information is denied

Customized Feedback. This is based on the information category. An additional option, “Income is not taxable”, would be available in the feedback options drop-down list if the transaction relates to an income.

Once the feedback is submitted, the information will reflect the modified figure in the bracket. The revised value will be used to update the derived value in the Taxpayers Information Summary (TIS).

The derived value in the TIS is then used to prefill the ITR form of the assessee.

The assessee can download the acknowledgement receipt from the activity history.

What is to be done if there is an error in the AIS or Form 26AS?

The AIS will include information currently available with the Income Tax department. According to the Income Tax Law, certain entities are liable to report high-value transactions to the department. The information in AIS will be shown only after the reporting entities furnish information to the department. There may be possibilities that the data of a particular period is not updated. Therefore, the assessees should check all the related information and report complete and accurate information in the return of income. The assessees may also follow the feedback mechanism to report mistakes in the AIS.

Which form should an assessee refer to when filing the ITR?

In case of deviation between the TDS or TCS information or the details of tax paid as shown in Form 26AS vs AIS, the taxpayer may rely on the information displayed in Form 26AS for filing the return. However, if the assessee has already filed his return of income and has found additional information in the AIS, he can revise it on the basis of the information shown in the AIS.

This will facilitate voluntary compliance and reduce underreporting of income by the assessees.

Difference between AIS and Form 26AS

Presently, Form 26AS mainly depicts details of high-value transactions and TDS/TCS transactions undertaken during the financial year.

Annual Information Statement is a way more detailed statement. It contains details of foreign remittances, purchase and sale transactions of securities/immovable properties, interest on deposits, savings account interest, etc. All the information is available in both aggregate form and transaction wise.

For example, if the taxpayer has earned savings account interest of Rs. 1,400 and interest on deposits of Rs. 35,000 from ABC bank during a particular financial year, Form 26AS will only show details of deposit interest of Rs. 35,000, on which TDS is deducted. On the other hand, the annual information statement will display the details of both transactions. In addition, the assessee can also see the details of the bank account from where the income was received, such as bank account number, bank name, account type, etc. Similarly, it will show all other financial information of the previous year, like rent received, dividends, salary, etc. 

AIS covers SFT information, payment of taxes, TDS/TCS transactions, demand or refund, and other information. But, if the assessee has to check turnover, based on the details furnished in Form GSTR-3B, it is visible only in Form 26AS. AIS does not display GST details.

Hence, the Annual Information Statement (AIS) is an extensive view of information for an assessee displayed in Form 26AS with an additional facility to accept feedback from the assessees on the information displayed in AIS.

Source:https://www.manishanilgupta.com/blog-details/annual-information-statement-extended-version-of-from-26as

Refund of Input Service credit under Inverted Duty Structure – Allowed or Not !!

 We all know how GST Mechanism generally works in India. We pay GST on our purchases, claim the credit of such GST, make outward sales, net-off the GST payable on sales with credit of GST & pay the balance GST amount to the government. But what if GST paid on our inward supplies becomes more than GST payable on our outward supplies.? In that case, we don’t need to pay anything extra for our outward supplies. Instead, the GST we have already paid on our purchases will start accumulating with the GST Department. Hence in such a case, we need to claim the refund of such accumulated GST amount according to section 54 of the GST Act. 

We should also be well versed with the GST refund process, to which taxpayers GST refund service is available and hire any professional for such purpose. Suppose we want to claim a refund from the GST Department of Delhi. We can avail the services of a GST refund consultant in Delhi or a GST refund expert in Delhi so that our refund can be processed hassle-free.

 

In this article, we attempt to comprehend the Refund of Input Tax Credit in the case of Inverted Duty Structure. We will start from the meaning of the topic & then dive into the topic much deeper.

 

Input Tax Credit: Credit of GST paid on the purchase of goods & services used in the course or furtherance of business.

 

Inverted Duty Structure: Case wherein GST tax rate on inputs is higher than the GST tax rate on output supplies.

 

Section 54(3): A taxpayer may claim a refund of any unutilised input tax credit at the end of any tax period in the following cases, subject to some documents required for GST refund:

 

1. zero-rated supplies made without payment of tax;
2.  Inverted Duty Structure

 

Exceptions: No refund of the unutilised input tax credit shall be allowed in the following cases:

 

1. Nil rated or fully exempt supplies;
2. Supplies as notified by the government like construction services;
3. Goods exported out of India subject to export duty and
4. If the supplier avails of drawback regarding central tax or claims refund of the integrated tax paid on such supplies.

Input Tax Credit in Inverted Duty Structure: 

 

1. Rule 89(5) provides a formula about the refund of ITC on account of inverted duty structure. In this rule, the term “Net ITC” is being used, which means input tax credit availed on inputs & as per section 2(59), Input means any goods other than capital goods.
2. Now, section 54(3) does not restrict the claim of ITC refund only for inputs, rather for input services as well.
3. While Section 54(3) allows for a refund of ITC for inputs as well as input services, Rule 89(5) gives a contradictory statement by including only input goods in the purview, and
4. If we follow the formula of Rule 89(5), it will create a distinction between inputs and input services.

High Court of Gujarat:

 

1. There is also a famous case in this regard named “VKC Footsteps India Pvt. Ltd. v. Union of India”. In that case, the Division Bench of the Gujarat High Court held that:

 “untilised input tax paid on “input services” in case of inverted duty structure shall also be allowed as a refund.”

    

2: The High Court, therefore, directed the Union Government to allow the claim for a refund of unutilised ITC on input services as part of “Net ITC” to calculate for the purpose of Rule 89(5).

 

High Court of Madras:

 

1. However, in the case of “Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India”, Division Bench of the Madras High Court refused to follow the view of the Gujarat High Court & came to a contrary conclusion. It was held that:

“benefit of refund shall only be available to the unutilised credit that accumulates on input goods and unutilised input tax credit that accumulated due to input services shall be excluded for refund.”

2:  In simple words, refund of unutilised ITC shall be available for input goods and not for capital goods & input services.

Supreme Court Ruling: 

 

1. As there were contrary judgements by High Court of Gujarat & Madras matter went to Supreme Court, and it upheldthe Judgment of the Madras High Court whereas the decision of Gujarat High Court will be set aside.
2. Therefore, Refund in cases of Inverted Duty Structure would be based on ITC on Inputs (Goods) only.

Current Scenario:

 

1. Now, the Supreme Court judgement did not bring an end to controversy or litigations in this matter. The question “whether refund will be granted” becomes more important than “how to claim GST refund”.
2. There have been instances wherein the GST Department has issued a Refund order allowing the refund of unutilised ITC on account of input services and issued DRC-07 just after sometime rejecting the claim of refund.
3. It has created a distinction between the suppliers having a higher component of input goods than those with a higher input service element and will discourage the suppliers from availing input services considering the above judgement that ITC Refund will not be available on such inward supplies, affecting the service industry.
4. On the flip side, it will also create new problem areas & new cases for litigation matters, generating new business avenues for litigation professionals.
5. Till today, Supreme Court judgment is upheld & refund of ITC is available only for input goods.

Source:https://www.manishanilgupta.com/blog-details/refund-of-input-service-credit-under-inverted-duty-structure--allowed-or-not

Types of Virtual Private Servers

 If you are looking for a hosting solution where you can avail dedicated server resources without having to opt for an exorbitantly priced dedicated server, then Virtual Private Severs (VPS) make that possible. In this blog, information shall be provided on Virtual Private Servers and their types, as well as on how these deliver dedicated server resources to the hosted sites.

VPS – Servers That Are Virtual and Private

A Virtual Private Server is a type of a web server on which the files of websites hosted with web hosting companies are stored and processed. This web server is provided by web hosting service providers, such as HTS Hosting, which is globally popular as the best web hosting company. Server space on a VPS can be availed through various plans offered by web hosting companies, in the form of VPS Hosting packages.

Once a VPS Hosting plan has been availed by a website owner, his website’s files get stored on a particular VPS provided by his service provider. These files are processed and delivered over the Internet to the browsers of those site visitors that initiate communication with the Virtual Private Server, requesting for the hosted site’s webpages.Upon the retrieval of the stored and processed web pages from the web server by the web browsers, the hosted site becomes accessible to the site visitors using those browsers. Every web server, including a Virtual Private Server, serves the same function, which is to make websites accessible online by providing a platform for the files of websites to be stored on and be retrieved from. Then, how does a VPS differ from the other types of web servers? Let us elaborate on it, by casting light upon the three main types of web servers. These are shared servers, dedicated servers and Virtual Private Servers (VPS).

A shared server is a type of a web server wherein a single physical server stores and processes the files of multiple websites on the same server. Due to this, none of the hosted sites gets to utilize dedicated server resources and every site has to function on shared sever resources, as well as exists in shared server space. This limited server resource availability, due to the sharing of server resources among multiple sites, adversely impacts the speed and performance of the hosted sites. The shared server space does not bode well with regard to the security of the hosted sites on the same web server.

A dedicated web server stores and processes the files of a single website on a single web server. This enables it to offer dedicated server resources to the hosted site, for not only boosting its speed as well as its performance but also for elevating its security. A dedicated server scores over a shared server by being able to provide the entire resources of the web server for the full utilization by the hosted site and by offering the flexibility to customize the web server. Moreover, dedicated IP addresses are provided, when dedicated servers are availed.

A Virtual Private Server can be described as a mix of both, a shared server and a dedicated server. That is because in a Virtual Private Server, multiple sites coexist on the same server, similar to the hosting scenario present in a shared server, but at the same time each of the hosted sites gets dedicated server resources, which happens with dedicated servers. How is this made possible? That is being explained next.

A Virtual Private Server is a web server that is not only able to store and process the files of multiple websites on a single physical web server but also provides dedicated server resources to each of the hosted sites for boosting the performance, speed and security of the hosted websites. This is made possible through Virtualization Technology, which virtually segments a physical server into multiple, isolated, private servers. Each of these several servers that has been created virtually, is configured to host a website and function independently as a truly private web serverthat can install its own operating system and software. In this manner, Virtualization Technology aids in creating several, isolated, independent, virtual, private, servers within a web server for providing the environment of a dedicated web server in a shared server environment. This enables the users of Virtual Private Servers to reap the benefits of using dedicated server resources, without having to opt for the comparatively more expensively priced plans of dedicated servers.

Next, we shall describe in detail the two different types of Virtual Private Servers.

The Different Types of Virtual Private Servers

All Virtual Private Servers serve the same function but differ in the way in which these are managed and are classified accordingly. Broadly speaking, there are two specific types of Virtual Private Servers. One of the types of VPS is that of Managed Virtual Private Servers, while the other is Self-managed Virtual Private Servers. Self-managed Virtual Private Servers are also referred to as Unmanaged Virtual Private Servers. Both these types of Virtual Private Servers are made available by various service providers for Linux and Windows.

A Managed Virtual Private Server is a Virtual Private Server that is provided by the service provider, as well as is managed and maintained by the service provider. It is kept fully-secure at all times and is updated by the service provider. All the tasks related to the effective management and maintenance of a Virtual Private Server are the responsibility of the service provider, from whom the Managed VPS has been availed. Availing a Managed VPS ensures that the user’s Virtual Private Server is always proficiently managed by the expert and thoroughly professional team of his service provider and the user doesn’t have to worry about its security and/or its proper maintenance.

An Unmanaged Virtual Private Server or a Self-managed Virtual Private Server, as the name itself suggests, isn’t managed by the service provider. Rather it is managed, maintained and kept secure by the user himself, without any assistance from the service provider in this regard. The service provider of a Self-managed Virtual Private Server provides the server to the user through a VPS Hosting plan. Post that, it becomes the sole responsibility of the user of the Self-managed Virtual Private Server to update,manage and maintain his VPS effectively and ensure its security. This type of Virtual Private Server is recommended for those that either have the required technical know-how for managing a VPS or have an in-house team to take care of the matters pertaining to the proper management and maintenance of a Virtual Private Server.

Conclusion:

Virtual Private Servers, be it Managed Virtual Private Servers or Self-managed Virtual Private Servers, offer an excellent web hosting solution, wherein dedicated server resources can be availed and utilized for gaining enhanced speed, performance and security of the hosted sites, at prices that are much lower than that for availing space on dedicated servers. This is the reason for the ever-increasing popularity of Virtual Private Servers, among the seekers of web hosting services, for effectively meeting the web hosting requirements of a wide range of websites.

HTS Hosting, a well-recognised brand in the arena of providing web hosting services, provides a wide range of affordably-priced and feature-rich VPS Hosting plans for availing Linux Managed Virtual Private Servers, Windows Managed Virtual Private Servers, Linux Self-managed Virtual Private Servers and Windows Self-managed Virtual Private Servers.

All the Virtual Private Servers offered by HTS Hosting deliver efficient service from the fully-equipped, state-of-the-art data centre of HTS (HTS Data Centre) and excel at providing seamless site availability, top-tier performance, high uptime, fast page loads and the highest standard of secure hosting service at budget-friendly prices.

Source: https://www.htshosting.org/knowledge-base/vps/364/types-of-virtual-private-servers

THE CRYPTO BILL 2021– A REALITY OR ILLUSION !

 As you know, Cryptocurrency has dominated almost every country, including India itself. You may be shocked to know that India is now the country with the highest number of people dealing in Cryptocurrency, surpassing the USA, Russia & many other countries.

 Cryptocurrency is based on Blockchain technology, and hence no information is available until & unless self-declared. Now, what is the Blockchain? A blockchain is a decentralized ledger accessed among the nodes of a computer network. Similar to the database, a blockchain stores information digitally. Blockchains play a crucial role in cryptocurrency systems, such as Bitcoin, to maintain a secure and decentralized record of transactions.

 You can refer to our previous blog, "Blockchain- Beyond Cryptocurrency", for more explanation.

 But this blog is all about valuable insights on the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.  

 Overall Landscape 

 The government has decided to list Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 for presentation in the Lok Sabha in the winter session. The Bill was previously presented in the budget session as well but could not be introduced as the government decided to redraft it.

 The government has no plans to boost the cryptocurrency sector in India; Finance Minister stated it in the Lok Sabha recently. A Bill on Cryptocurrency and Regulation of Official Digital Currency is expected to be present during the seventh session of the Lok Sabha. Presumably, the government plans to ban all private cryptocurrencies, with certain exceptions.

 The new Cryptocurrency bill is set to empower regulators and government agencies, including the Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), and the tax department, to scrutinize Know Your Customer (KYC) data of investors that crypto exchanges have collected from clients. According to rumours, the new regulations would mandate cryptocurrency exchanges to share their KYC data, which mainly includes details of their investors, with the government. The new cryptocurrency framework would also establish a uniform KYC process that every exchange must adhere to. As things stand today, different cryptocurrency exchanges have different KYC processes.

 The first control of Cryptoassets will remain with the existing crypto platforms, regulated by India's Securities and Exchange Board (SEBI). A cut-off date will be issued for those holding crypto assets to declare and bring under the crypto exchange platforms the SEBI will regulate. Reserve Bank of India's proposed virtual currency has not been clubbed with the new crypto legislation. However, the central bank will regulate issues related to Cryptocurrency.

 Some details by Finance Minister itself

 Finance minister Nirmala Sitharaman stated on 30.11.2021, i.e. Tuesday, "The government plans to table a redrafted bill on cryptocurrency in the winter session of Parliament after the approval of Cabinet, and notified the Rajya Sabha that income earned from investing in cryptocurrencies is taxable". She added, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to form a framework for designing the official digital currency to be issued by the Reserve Bank of India (RBI). According to the words on the street, it aims to ban all private cryptocurrencies while promoting the underdog technology of Cryptocurrency and its benefits for certain exceptions (not defined till so far).

 The income earned by crypto and other related services providing platforms is liable to tax under Business or Profession Head under Chapter-IV of the Income-tax Act, 1961. She added that the applicability of the tax rate would depend on the status and category of the taxpayer.

 On another query, whether the government has conducted any study for regulating Cryptocurrency, Finance Minister said that a study was performed by the government through a research organization on 'Virtual Currencies: An Analysis of the Legal Framework and Recommendations for Regulation' in July 2017. After that, the government constituted an Interministerial Committee (IMC) on 2nd November 2017 under the Chairmanship of Secretary (Economic Affairs) to study the issues related to Virtual Currencies and propose specific action to be taken in this matter.

 For regulation of cryptocurrencies, she further clarified that the question of monitoring or regulating cryptocurrency transactions, if any, is consequent to the passage of the Bill in Parliament."

 What are we going to witness new?

 In 2019, the Bill was named 'A Blanket Ban'; The 'Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019' stated that no one should mine, generate, hold, sell, or deal in issue, transfer, dispose of or use Cryptocurrency.

 Fast-forwarding to 2021, a number of things have changed. The Bill is now called 'Cryptocurrency and Regulation of Official Digital Currency Bill, 2021', which was first presented for the Budget session but was deferred for more comprehensive consultations. Since its inception, the industry has witnessed exponential growth with greater participation. The government also consulted crypto associations, exchanges and other experts to decide on the way forward, fueling optimism among stakeholders.

 Reportedly, there will be some government's own recognized platform on which crypto trading will be done. So, there may be a chance for a new regulatory body or cryptocurrencies to be brought under the Reserve Bank of India (RBI).

 Also, since crypto involves cross-border transactions, a Securities and Exchange Board of India (SEBI)-like body will be required to monitor trades.

 Talking about taxation, the government plans to bring investments in Cryptocurrency by Indian citizens on domestic & international platforms under the ambit of Income Tax instead of a straight outright ban. There are currently no specific guidelines under Income Tax Act, 1961. But it's more probable that a high rate will be used to slow down the rush that Indian crypto exchanges have witnessed over the past two years.

 A glimpse: How the other countries regulated the Cryptocurrency 

 1: United Kingdom: All the businesses engaged in Cryptocurrency related activities in the UK have to register with the UK's Financial Conduct Authority (FCA). Crypto-businesses are required to apply for the 'Authorized Payment Institutions' license. BCB Payments Limited was the first crypto asset company to get this license in the UK. Under UK law, all crypto-asset businesses must comply with Anti-Money Laundering (AML) & Combating the Financing of Terrorism (CFT). Bitcoins are recognized as property under UK law.

 2: Singapore: Trading in cryptocurrencies is legal and regulated by the Monetary Authority of Singapore under Singapore's Payment Services Act, 2020. Crypto-Asset businesses must obtain a license to operate on the cryptocurrency platform. Public issues of digital coins are also regulated under Singapore's Securities and Futures Act, 2001. One of India's largest cryptocurrency exchanges, CoinDCX, migrated its holding to Singapore. The startup has till now raised over INR 100 crores from global investors.  

 3: Indonesia: It initially banned Cryptocurrency but then legalized it. Previously in January 2018, Indonesia banned all parties involved in digital currency transactions. However, in 2019, Indonesia published regulations to regulate the trading of cryptocurrencies as a commodity under its Commodity Futures Trading Regulatory Agency(CFTRA). Any entity dealing in Cryptocurrency as commodity futures must comply with AML/CFT norms. The entities must also report to the Indonesian Financial Transaction Reports and Analysis Center.

 4: Canada:1 In 2018, Canada issued a notice clarifying that securities law compliances will apply to crypto-businesses offering coins or tokens. In January 2020, another statement explained the situations where securities law would apply to platforms facilitating trading of Cryptocurrency. From June 2020, Canada's money laundering law requires all entities dealing in digital currency to register under the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and implement the applicable AML/CFT measures.

Thus, all the above countries that have introduced laws to regulate cryptocurrency trading have taken good care of fraud and money laundering activities; they have subjected cryptocurrency businesses to the respective AML/CFT measures. India can also follow a similar approach to this.

All in all, India is yet to witness the upcoming regulations for Crypto Bill. Some information is already on the street, along with some rumours. We currently don't know which cryptos will get banned and declared official. This step is taken to protect our Real Currency, i.e. Rupees, so its value remains in the global market for foreign exchange. As we know, there's no actual business behind Cryptocurrency; people are just trading money for money. Banning Cryptocurrency at a single go could significantly impact the economy in terms of capital loss. The government has taken such a right decision for making it legalized.

Source: https://www.manishanilgupta.com/blog-details/the-crypto-bill-2021-a-reality-or-illusion

Understanding due Diligence and ITS Importance

 Before entering into a business transaction, one looks out for n number of factors affecting the trade. Consideration involved, growth prospects in the future, taxation, law compliances, and many other points are considered. But is it enough to forethought about these factors only, or are there other points too, to give a thought about? 

While trying to know what growth one can expect out of a transaction in the future, we often overlook the background of the business. The past of any organisation influences its future also. Suppose company A wants to take over company B. Company A sees the transaction as a good one by only looking at the future growth potential, but it misses taking note of its past litigations. If A makes the deal and learns about the legal issues later, it will also impact its future as they were unaware of them.Now, one can think of how significant due diligence is for an impending transaction.

 Due diligence is a type of investigation into the company's affairs, revealing information about the organisation that is not readily available to outsiders but can only be found out if investigated and looked into intensely. In this text, we have covered almost everything about this due diligence activity, which can help decide you better, whether to make or break the deal. 

 Due diligence is a background check to examine and evaluate all the possible growth aspects and risks involved in and after the transaction. It is done for the safety of both the buyer and seller's interests. 

Some of the different areas where due diligence is needed before entering into a deal or transaction are 

•  Takeover
•  Merger and acquisition
•  Public issue of securities
•  Due diligence of banks

 Due diligence stages-

 This process of due diligence can be divided into three phases; pre-diligence, diligence and post diligence. All these phases are essential to the whole operation. 

 Pre diligence: This is the initial stage in which the documents are collected for examination later. This step is all about planning. A checklist is prepared, and following that, all the documents are asked for. These documents are then taken into this physical or virtual location called a data room. 

 Before providing the documents and information, it is good to sign a letter of intent (LOI) and a non-disclosure agreement (NDA) between the parties.

•  Letter of intent ensures that the parties intend to enter into a business transaction. It does not necessarily bind the parties to enter into the transaction, as the parties can still withdraw their proposal on finding anything that seems to them as a deal-breaker. 

•  NDA is the most important agreement when it comes to providing confidential business information to the other party. By entering into this agreement, the buyer becomes legally bound to keep the data secured and confidential. 

 The data collection process is a tedious job. To manage this task along with the primary operations of the company is challenging. To avoid this hardship, one can outsource this work by hiring an external agency having experience of proficiently handling such tasks. This process is also time-bound, making it even more important to use it to the full advantage in a limited time frame.

 The documents should be examined and read carefully. This examination depends on the transaction. If the deal is crucial and holds great significance to the party, the investigation should be thorough, covering every piece of information provided by the other party. 

 When collecting data, it is important to categorise and plan what is needed and what is not. The transaction itself is a hectic task; hence, one should avoid unnecessary information and only examine selective material data, making the job less time-consuming. Below given are the points which are common in nature and looked into while carrying out diligence process for any transaction-

•  The charter documents of the organization
•  Loan and charges created on any property of the organisation 
•  Financial statements and other related information
•  History of the organisation, its employees, business failures, if any
•  Existing contracts and agreements 
•  Compliance with the laws or any litigation, past or present
•  Information about partners, suppliers and customers

 Diligence: A due diligence report is prepared and submitted to the management of the party to which it concerns. This report should be prepared carefully, as all the output from this process depends highly on this report. One should try to make the report concise and direct.

 It should include-

•  the purpose behind this diligence process
•  documents used in the process
•  complete analysis, end conclusion and other points to be considered

This report should mainly focus on-

• The commercial viability of the transaction or project
• Future growth prospects if the transaction is entered into
• The level of synergy expected out of the proposed transaction
• Technology being used in the organisation
• Possible risks and liabilities
• Litigation existing or expected
• Employees of the organisation, their potential and reluctance to change, if any

Post diligence: After examining the documents and reporting, the buyer decides whether he wants to break or make the deal based on the findings stated in the report. The scope for negotiation is known, and this is the part where the buyer holds power to bargain and ask for warranties if needed.

 This process has its own limitations, which one should keep in mind all the time so that the chances of errors are minimised.

•  Due diligence is performed to reveal the true picture and state of the business. But the findings of this process depend majorly on the information provided by the seller. There are great chances that the seller may try to hide its business's negatives or show reluctance to assist. So, it becomes the job of the professional carrying out the task to divulge as much as possible.

•  This being a tiresome task, extra patience and a calm attitude are expected from both parties.

•  Poor understanding of the objectives and motives may not get the best results. 

•  This process is costly and involves intensive mental labour. So, efforts should be made to wrap the work at the earliest.  

 All things considered; due diligence is like a SWOT analysis. It is a tedious job, but in today's world, where it is so easy to conceal and misrepresent facts, it becomes crucial to become fully informed about the organisation before entering into the transaction and avoid losing later. 

 

Source: https://www.manishanilgupta.com/blog-details/understanding-due-diligence-and-its-important