Received a Benami Notice? How to Protect Yourself and Reply Correctly

By CA Surekha S Ahuja

A notice from the Benami Prohibition Unit does not automatically mean that you are accused of holding benami property. You may simply be a lender, borrower, relative, business associate or person asked to provide information.

But your response matters. Ignoring a lawful notice can invite penalties; an inaccurate or unnecessarily broad reply can create problems where none existed.

The right approach is to identify the provision invoked, establish the facts, answer what is relevant and challenge what is legally unsustainable.

1. Is the transaction actually benami?

Section 2(9) of the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act) defines benami transactions and specifies exceptions. Under section 2(9)(A), the relevant inquiry includes property held by one person, consideration provided by another, and whether the property is held for the benefit of the person providing the consideration, subject to the statutory conditions and exceptions.

Consider the distinction:

• Genuine loan: A brother-in-law advances ₹25 lakh through banking channels. The borrower records the loan and is liable to repay it. The lender's right is to receive money, not automatically to own the property purchased.

• Family assistance: A parent contributes towards a child's house. The contribution alone does not establish that the parent retains beneficial ownership.

• Potential benami arrangement: One person funds property in another's name but retains its real benefits or control. The facts may warrant investigation.

The source of funds matters, but it is not conclusive by itself.

In P. Leelavathi v. V. Shankarnarayana Rao, AIR 2019 SC 1938, the Supreme Court recognised that financial assistance alone does not establish a benami transaction. Intention and surrounding circumstances must be examined.

Other relevant authorities include Jaydayal Poddar v. Mst. Bibi Hazra, (1974) 1 SCC 3, and Valliammal v. Subramaniam, (2004) 7 SCC 233. The burden of establishing a benami claim rests on the person asserting it, in accordance with law.

Remember: A family relationship or bank transfer is not a complete defence. The real nature of the transaction must be established through evidence.

2. A genuine loan must also withstand tax scrutiny

A transaction may not be benami and may nevertheless raise questions under applicable tax provisions.

Issue	Evidence to maintain
Identity of lender	PAN, address and identification
Creditworthiness	Returns, accounts and source of funds
Genuineness	Bank statements, confirmation and ledger
Accounting treatment	Consistent disclosure in the parties' records
Repayment	Loan terms, repayment entries and outstanding balance
Cash compliance	Compliance with sections 269SS and 269T, where applicable

Sections 269SS and 269T generally restrict acceptance and repayment of specified loans and deposits of ₹20,000 or more otherwise than through permitted modes, subject to statutory exceptions. Section 68 may apply where a credit in the books is not satisfactorily explained under the applicable law.

An interest-free loan is not, by itself, evidence of a benami arrangement. Equally, describing a payment as a loan does not prove its genuineness.

If the funds came from a relative's business, establish who actually lent the money and support the explanation with that person's or entity's accounts, bank statements and tax records.

3. Identify the notice before deciding how to reply

Provision	What it generally indicates	Your response
Section 21	Information sought for purposes of the Act	Answer relevant questions and raise specific objections to excessive or unrelated demands
Section 19	Summons to attend, give evidence or produce documents	Comply or seek appropriate relief; prepare carefully before giving a statement
Section 23	Inquiry or investigation	Establish its scope and respond to lawful requirements
Section 24(1)	Show-cause notice concerning alleged benami property	Examine the property-specific allegation, material and statutory requirements urgently
Section 26	Adjudication concerning the property referred to the Adjudicating Authority	Prepare evidence and legal submissions and use applicable procedural rights

The legal effect depends on the exact notice and stage of proceedings. A section 21 information notice is not the same as a section 24(1) show-cause notice.

For a formal section 24 notice, the Finance (No. 2) Act, 2024 introduced a limit under section 24(2A) on the time allowed, including extensions: it cannot exceed three months from the end of the month in which the notice is issued. Changes also extended the relevant periods under sections 24(3) and 24(4) from 90 days to four months, subject to the statutory requirements.

Section 55A provides a conditional mechanism for immunity from prosecution for specified offences. It is not automatic and requires compliance with the statutory conditions.

Check the actual notice and applicable law before calculating deadlines. If more time is needed, apply in writing immediately; a pending request does not automatically extend the deadline.

4. How to prepare a defensible reply

Follow these steps:

1. Preserve the notice: Keep the complete notice, attachments, envelope or email and proof of service. Record the deadline.

2. Identify your capacity: Establish whether you are being treated as an alleged benamidar, beneficial owner, witness or information provider.

3. Prepare a transaction chronology: Record dates, amounts, parties, bank details, purpose, accounting treatment and repayments.

4. Collect supporting evidence: Obtain relevant bank statements, loan confirmations, ledgers, audited accounts, tax returns and property documents.

5. Raise specific objections: Where justified, seek clarification of the property or transaction concerned, your capacity, the legal basis of the demand and access to material that may lawfully be disclosed.

6. Answer within time: Provide accurate information relevant to the notice. Explain any inability to produce records and request a specific extension.

7. Reconcile everything: Ensure that the reply is consistent with tax returns, accounts, bank records and earlier statements.

8. Retain acknowledgement: File through the prescribed or permitted channel and preserve the complete submission.

The burden of proving a benami allegation does not mean that a recipient can ignore a lawful information request. Equally, the authority's power to seek information does not make every demand automatically valid.

5. Full reply or preliminary objection?

Situation	Recommended approach
Documented loan and specific questions	Give a factual reply supported by evidence, preserving valid objections
Vague or apparently excessive demand	Raise a reasoned objection and request clarification
Section 24(1) show-cause notice	Obtain professional assistance and prepare a substantive response
Summons for a statement	Prepare the records and seek advice on the scope of the summons
Proposed attachment or adjudication	Obtain urgent professional assistance

Where appropriate, factual information may be provided without prejudice to legal objections. This wording does not protect an inaccurate statement or excuse non-compliance.

Preliminary-objection template

To: The Initiating Officer, Benami Prohibition Unit, [City]

Subject: Reply to notice under section [applicable section] of the PBPT Act, 1988 — DIN [number] dated [date]

Sir/Madam,

1. The notice dated [date] was received on [date], requiring a response by [deadline].

2. I request clarification of the specific transaction or matter under inquiry, my capacity in the proceedings and access to relevant material that may lawfully be disclosed and is necessary for an effective response.

3. To the extent that the notice seeks records without an identifiable connection to the stated inquiry, I respectfully request clarification and appropriate restriction of its scope. The specific objections are set out in the accompanying note.

4. Without prejudice, the relevant facts within my knowledge and records are as follows: [state the relationship, transaction, amount, dates, banking trail, accounting treatment and repayment position, as applicable].

5. The supporting documents are enclosed as indexed. I request that they be considered before any adverse conclusion is drawn and that an opportunity of hearing be provided wherever required by law.

This reply does not admit any allegation not expressly accepted. I reserve the right to submit further material and arguments in accordance with law.

Yours faithfully,

[Name, address and date]

Important: Adapt the template to the notice. Do not demand recorded reasons or approvals as an automatic entitlement at every stage; the request must be appropriate to the provision and procedural stage.

6. Seven mistakes to avoid

• Ignoring the notice: Failure to comply with a lawful requirement can attract penalties.

• Denying a real transaction: Explain its true nature instead of denying facts that records establish.

• Treating a bank transfer as conclusive: It proves movement of funds, not necessarily the transaction's purpose or beneficial ownership.

• Assuming relatives are exempt: Section 2(9) contains specific, conditional exceptions; an in-law relationship is not a blanket exemption.

• Making inconsistent statements: Reconcile the reply with accounts, returns and property documents.

• Signing an unchecked statement: Read it carefully and seek correction of material errors through the proper process.

• Relying only on a preliminary objection: Preserve valid objections, but do not treat them as a substitute for compliance or a substantive defence.

7. Important developments and special situations

Ganpati Dealcom: The Supreme Court recalled its 2022 judgment on review in October 2024. Do not cite the recalled judgment as settled authority on the retrospective application of the 2016 amendments. Transactions predating the amendment require case-specific legal analysis.

Income-tax Act, 2025: It came into effect on 1 April 2026. For earlier tax periods, determine the applicable law and transitional provisions before citing section numbers.

Death of a party: Section 66 addresses proceedings in specified circumstances against legal representatives. The continuation of proceedings concerning property, a legal representative's liability and personal penal liability are distinct issues. Preserve contemporaneous evidence and obtain legal advice before relying on death as a defence.

8. When is professional assistance essential?

Consult a chartered accountant or advocate promptly if the notice alleges that you are a benamidar or beneficial owner, attachment is proposed, a statement is to be recorded, several entities or years are involved, the records contain inconsistencies, or adjudication has commenced.

The professional support required will depend on whether the main issues concern accounting evidence, tax compliance, statutory interpretation or litigation.

CA S.Ahuja Perspective

A benami notice is a reason to act carefully—not to panic, and certainly not to remain silent.

A genuine loan does not become benami merely because the money was used to purchase property. But a bank transfer, a family relationship or a ledger entry is not a complete defence by itself.

Identify the notice. Establish the facts. Support the transaction. Challenge what is legally unsustainable. Respond within time.

Disclaimer: This article provides general information and is not a substitute for advice on a specific notice or proceeding. Verify the applicable statutory provisions, amendments, judgments, deadlines and remedies before filing a reply.

Form ADT-1: Due Date, Late Fees and Auditor Appointment — Complete Guide for 2026

 By CA Surekha S Ahuja

An AGM held on 30 September 2026 ordinarily makes 15 October 2026 the last date for filing Form ADT-1 without an additional fee. The meeting date is excluded while counting the 15-day period.

If MCA V3 shows an additional fee on the due date, check the appointment category, date entered and applicable fee provisions before concluding that the portal is wrong.

This practical guide covers every major auditor appointment route, filing deadlines, late fees and the errors companies should avoid.

Applicable law: Sections 139–142, 144, 147 and 403 of the Companies Act, 2013; Companies (Audit and Auditors) Rules, 2014; and Companies (Registration Offices and Fees) Rules, 2014, as amended.

1. ADT-1: Appointment route and deadline

Appointment	Who appoints	ADT-1 filing trigger
First auditor — non-government company	Board within 30 days of incorporation	Board meeting date
First auditor if Board fails	Members at EGM within 90 days of incorporation	EGM date
First auditor — government company	CAG, then Board, then members under Section 139(7)	Actual appointment date
Regular auditor	Members at AGM under Section 139(1)	AGM date
Government company — subsequent auditor	CAG within 180 days from commencement of financial year	Actual appointment date
Casual vacancy, other than resignation	Board within 30 days	Board meeting date
Casual vacancy due to resignation	Board recommends; members approve within three months	Follow the statutory sequence and applicable MCA filing instructions

The ordinary filing period is 15 days from the meeting at which the appointment is made. The appointment deadline and the ADT-1 filing deadline are separate obligations.

2. First auditor: the 30-day versus 15-day distinction

For a non-government company, the Board must appoint the first auditor within 30 days of incorporation. If it fails, the members must appoint the auditor at an EGM within 90 days of incorporation.

The first auditor holds office only until the conclusion of the first AGM.

Example: A company is incorporated on 10 June 2026. The Board appoints its first auditor at a meeting on 2 July 2026.

• Board's appointment deadline: 10 July 2026.

• ADT-1 deadline: 17 July 2026.

The filing period runs from the actual appointment meeting, not from incorporation.

For a government company, Section 139(7) prescribes a separate sequence: 60 days for the CAG, the next 30 days for the Board and the next 60 days for the members if the earlier authorities fail to appoint.

3. Five-year appointment at the AGM

Under Section 139(1), the auditor appointed at the first AGM ordinarily holds office from the conclusion of that AGM until the conclusion of the sixth AGM. Subsequent appointments follow the statutory cycle.

Before appointment, obtain the auditor's written consent and eligibility certificate under Section 141 and the applicable Rules. Follow the prescribed recommendation and selection procedure, where applicable, and inform the auditor after appointment.

Three points matter:

• Fresh ADT-1: A reappointment under Section 139(1) ordinarily requires a fresh filing.

• No annual ratification: The statutory requirement for annual ratification was omitted with effect from 7 May 2018.

• No appointment at AGM: Section 139(10) provides for continuation of the existing auditor in the specified circumstances. Record the position in the minutes and distinguish it from a case where the AGM itself was not held.

Where a different auditor is proposed in place of the retiring auditor, examine the special-notice and representation provisions under Sections 140(4) and 115.

4. Auditor rotation and casual vacancies

Auditor rotation — Section 139(2)

Rotation applies to specified classes of companies, including listed companies and prescribed classes of unlisted public and private companies. The relevant thresholds and exclusions must be checked against Rule 5.

Auditor	Maximum consecutive tenure	Cooling-off
Individual	One five-year term	Five years
Audit firm	Two consecutive five-year terms	Five years

Check the company's eligibility for rotation every year, particularly when its paid-up capital or borrowings change.

Casual vacancy — Section 139(8)

• Other than resignation: The Board fills the vacancy within 30 days.

• Resignation: The Board recommends a replacement within 30 days, and members approve the appointment at a general meeting within three months of the Board's recommendation.

• Government company: The CAG fills the vacancy within 30 days.

The replacement ordinarily holds office until the conclusion of the next AGM. Verify the applicable ADT-1 filing treatment for the specific route instead of automatically filing twice.

Removal and resignation — Section 140

Removal before the end of the term requires the prescribed process, including prior Central Government approval, an application in Form ADT-2 and a special resolution within 60 days of receipt of approval.

On resignation, the auditor must file Form ADT-3 within 30 days, stating the reasons and relevant facts. This creates a casual vacancy to be filled under Section 139(8).

5. Counting the 15 days: the 30 September AGM

Section 9 of the General Clauses Act, 1897, generally requires exclusion of the first day when a period runs from a specified date.

AGM date	ADT-1 due date	First 15 days of delay	More than 15 days, up to 30 days
30 September 2026	15 October 2026	16–30 October	31 October–14 November
27 September 2026	12 October 2026	13–27 October	28 October–11 November

These dates assume no specific relaxation applies. The filing period is ordinarily counted in calendar days.

6. ADT-1 filing fees

The normal filing fee depends on nominal share capital.

Nominal share capital	Normal fee
Less than ₹1 lakh	₹200
₹1 lakh to less than ₹5 lakh	₹300
₹5 lakh to less than ₹25 lakh	₹400
₹25 lakh to less than ₹1 crore	₹500
₹1 crore or more	₹600
Company without share capital	₹200

Verify the applicable fee against the current MCA fee schedule.

Additional fee for delay

Under the applicable fee framework, the additional fee for ADT-1 is calculated using the period of delay:

Delay	Additional fee
Up to 15 days	1 times normal fee
More than 15 days up to 30 days	2 times normal fee
More than 30 days up to 60 days	4 times normal fee
More than 60 days up to 90 days	6 times normal fee
More than 90 days up to 180 days	10 times normal fee
Beyond 180 days	12 times normal fee

The additional fee is payable in addition to the normal fee. The higher-additional-fee provisions apply only in the circumstances prescribed by the Rules; they should not be assumed to apply to ADT-1 merely because the company has defaulted in other filings.

Example: If the normal fee is ₹400 and ADT-1 is filed one day late, the total is ordinarily ₹800: ₹400 normal fee plus ₹400 additional fee.

Payment of the additional fee does not necessarily remove liability for an underlying statutory default.

7. Why MCA V3 may show an unexpected additional fee

Check these items in order:

1. Appointment date: For an AGM appointment, use the date of the AGM at which the appointment was made—not the earlier Board recommendation date.

2. Appointment category: Select the category that reflects the actual statutory route.

3. Meeting date: If the resolution was passed at an adjourned meeting, ensure that the form reflects the relevant appointment date.

4. Fee calculation: Recheck the statutory due date, delay period and applicable fee slab.

5. Supporting evidence: If the calculation still appears inconsistent, retain screenshots and raise a ticket with the MCA helpdesk.

Do not assume that every unexpected fee is a portal error. Equally, do not delay a time-sensitive filing unnecessarily while waiting for a response.

8. The filing checklist

Before filing

• Appointment resolution passed by the correct authority.

• Auditor's written consent and Section 141 eligibility certificate obtained.

• Auditor's particulars verified.

• Correct appointment category and date selected.

• Tenure and joint-auditor details, where applicable, checked.

• Required attachments uploaded.

• Authorised signatory's DSC valid and usable on MCA V3.

• Normal and additional fees verified.

• Challan, SRN, acknowledgement and relevant screenshots retained.

Eligibility checks under Section 141

Confirm that the auditor is qualified and free from statutory disqualifications, including applicable restrictions relating to employment, prohibited relationships, securities, indebtedness, business relationships, audit limits and services prohibited under Section 144. Apply the statutory thresholds and exclusions as enacted.

CA S. Ahuja perspective

ADT-1 is a short form with three critical controls: the correct appointment route, the correct appointment date and the correct filing deadline.

For an AGM held on 30 September 2026, the ordinary due date is 15 October. A disciplined review of the resolution, consent, eligibility certificate, form particulars and fee calculation can prevent avoidable filing costs and compliance disputes.

Disclaimer: This article is for general information and is not legal advice. Verify the current statutory provisions, fee schedule and MCA V3 instructions before filing.

Employee Wants to Change Tax Regime Mid-Year? What Employers Should Do

 By CA Surekha S Ahuja

An employee chooses the new tax regime in April. The appraisal is finalised in July. The employee now asks HR to switch to the old regime.

HR replies: “The declaration window is closed.”

Can the employer refuse? Can payroll accommodate the request? And does the employer’s approval settle the employee’s final tax position?

These are three different questions—and confusing them can create avoidable payroll disputes and TDS errors.

The legal position: payroll declaration is not the final tax option

For Tax Year 2026–27, the governing law is the Income-tax Act, 2025, read with the Income-tax Rules, 2026.

Section 202 makes the new tax regime the default, subject to the statutory provisions for opting out. Section 202(4), read with Rule 136, provides for exercising or withdrawing the statutory option through the return of income in the prescribed manner.

The position also depends on whether the individual has income from business or profession:

• Without business or professional income: The individual can generally choose the applicable regime annually through the statutory return process.

• With business or professional income: Additional restrictions govern the timing, withdrawal and subsequent exercise of the option. These must be checked separately.

The regime declaration submitted to an employer is used for payroll and TDS estimation. It should not be confused with the statutory option exercised under the Act.

An internal declaration deadline is a payroll control—not a substitute for the statutory rules. Equally, a late request does not automatically require the employer to reopen processed payroll.

Legal references: Section 202(4), Income-tax Act, 2025; Rule 136, Income-tax Rules, 2026.

What should HR and payroll do?

Situation	Recommended action
Request received within the company’s declaration window	Process it under the standard payroll procedure.
Request received after appraisal	Reassess the employee’s estimated tax and consider a revised payroll calculation under the company’s policy.
Payroll for the month is already processed	Avoid informal retrospective changes. Assess whether future TDS deductions can be adjusted lawfully.
Employee requests a switch from new to old regime	Recalculate the estimated liability using only the exemptions and deductions available under the old regime, subject to the applicable conditions.
Employee requests a switch from old to new regime	Recalculate under the new regime, excluding claims not permitted under it.
Employee has business or professional income	Check the restrictions under section 202(4) before advising on the statutory option.
Supporting documents or particulars are incomplete	Seek the prescribed information and evidence before factoring eligible claims into the TDS estimate.

The company may prescribe declaration windows, cut-offs and an exception-approval process. It should apply them consistently and in accordance with the law.

Why the employer cannot treat this as merely an HR preference

Section 392(1) requires salary TDS to be deducted at the applicable average rate on the basis of estimated salary income for the tax year. The provisions of section 392 also govern relevant employee particulars, evidence and adjustments to deductions.

Consequently, the employer must maintain a reasonable, supportable TDS computation. A declaration signed in April does not eliminate that responsibility.

This does not mean that every late request must be accepted. It means the decision should be documented, the tax estimate should be reviewed where appropriate, and deductions should be adjusted only in accordance with the applicable provisions.

A practical control framework for employers

A defensible process needs only six steps:

1. Record the request: Obtain the employee’s written request, proposed regime and effective payroll month.

2. Check eligibility: Identify whether business or professional income affects the statutory option.

3. Recalculate: Review revised salary, eligible claims, other income information supplied by the employee and TDS already deducted.

4. Apply the payroll policy: Decide whether the revised estimate can be accommodated in the current or a subsequent payroll.

5. Document the decision: Record the reasons for approval or rejection and communicate the outcome to the employee.

6. Reconcile before year-end: Review the remaining tax liability and adjust future deductions lawfully where required.

Payroll approval should not be represented as confirmation that the employee has validly exercised the statutory option. That remains subject to the Act and the prescribed return process.

What should the company’s policy say?

The policy should specify:

• The standard window for initial declarations.

• The procedure for exceptional mid-year requests.

• The payroll cut-off and treatment of already processed salary.

• The particulars and evidence required for relevant claims.

• The process for recalculating and adjusting TDS.

• The employee’s responsibility to verify statutory eligibility and file the return correctly.

Avoid two extremes: promising unrestricted changes throughout the year or stating that every late request is automatically barred by law.

A clear policy protects payroll operations without confusing internal administration with statutory requirements.

CA S. Ahuja Perspective

A closed declaration window does not close the law’s statutory options. An employee’s request, however, does not oblige payroll to reopen every completed transaction.

The employer’s best protection is a documented policy, a defensible TDS estimate, consistent treatment of requests and a clear audit trail. Employees should separately verify their eligibility and exercise the statutory option in the prescribed manner.

For HR, the objective is not to approve or reject requests mechanically. It is to ensure that the payroll decision is supportable, the TDS computation is correct and the statutory position is respected.

Disclaimer: This article provides general guidance on the law applicable to Tax Year 2026–27 as at 14 October 2026. The outcome depends on the employee’s income profile, statutory eligibility and the facts of the case. It is not an individual tax opinion

57th GST Council Reforms 2026: Retrospective Relief, Faster Refunds and What Businesses Must Do Now

 A GST reform can put money back into a business—or change nothing for it today. The difference lies in the effective date, eligibility and legal status of the relief.

By CA Surekha S Ahuja | 13 October 2026

The 57th GST Council’s recommendations could unlock working capital, reduce tax costs and ease litigation. But not every relief applies retrospectively, and not every announced benefit is available for immediate use.

For businesses, the priority is clear: identify the relief that affects cash flow or tax exposure, establish when it becomes legally available, and act before an eligible opportunity is missed.

This analysis separates retrospective relief, transitional treatment for pending cases and prospective reforms—and explains what businesses should do now.

1. Which GST reliefs are retrospective?

Category	Reform	What it means for business
Retrospective effect recommended	Omission of Rule 96(10) from 23 October 2017	Review historical export-refund disputes. Refunds and reopening of concluded matters are not automatic.
Transitional relief proposed	₹10,000 minimum threshold for specified tax demands	Qualifying notices and appeals pending when the provision commences may receive the proposed transitional treatment. This is not a general reopening of all past demands.
Specified past cases	Classification disputes, including sublimation paper and qualifying seaweed-based bio-stimulants	Apply the prescribed “as is where is” treatment. It does not automatically entitle every taxpayer to a refund.
Prospective	Refund of eligible input-service ITC in inverted-duty cases	Recommended for ITC availed on or after 1 November 2026.
Prospective	Refund of eligible capital-goods ITC	Recommended for ITC availed on or after 1 April 2027, spread over 60 months.
Awaiting implementation	Wider blocked-ITC eligibility, prosecution and penalty changes, refund automation, registration simplification and return alignment	Continue following existing law until the relevant provisions take effect.

These categories must not be conflated. A measure that benefits a pending case is not necessarily retrospective for all taxpayers, and regularisation of specified historical disputes does not create a universal refund entitlement.

The operative amendment, notification, circular and transitional provisions must be checked before a business claims a benefit or changes its GST treatment.

2. Refunds: the immediate working-capital opportunity

90% provisional refund for eligible low-risk claims

The Council recommended automated provisional sanction of 90% of the amount claimed in eligible low-risk refund applications relating to specified zero-rated supplies and inverted-duty cases.

It also recommended reducing the acknowledgement or deficiency-memo period from 15 days to 10 days, with deemed acknowledgement in specified circumstances.

For a business with a ₹1 crore eligible refund claim, a 90% provisional sanction would represent ₹90 lakh, subject to the prescribed conditions and risk assessment. This is an illustration of the proposed mechanism, not a guarantee of payment within a fixed period.

Business action: Reconcile refund calculations with returns, export documents and electronic ledgers before filing. Faster processing cannot compensate for an ineligible claim or inaccurate data.

Removal of the 1.5-times export-turnover ceiling

The Council recommended removing the restriction in Rule 89(4)(C) that limits the relevant turnover of zero-rated supplies of goods by reference to 1.5 times the value of like goods supplied domestically.

Exporters with higher export prices or no comparable domestic sales may benefit.

Business action: Quantify the potential refund impact. For past periods, examine the operative amendment, limitation and procedural position before seeking revision of an earlier claim.

Rule 96(10): retrospective relief for export-refund disputes

The Council recommended omission of Rule 96(10) with effect from 23 October 2017, in accordance with the Supreme Court decision.

Exporters whose disputes specifically arise from this restriction should review their historical cases, including matters involving export-promotion or concessional-procurement benefits.

Business action: Prepare a case-wise schedule of notices, adjudication orders, appeals, amounts paid and refunds sanctioned. Identify the exact provision relied upon in each case and the relief legally available after implementation.

Retrospective omission does not automatically reverse every past rejection or reopen every concluded proceeding.

Excess cash-ledger balances and the ₹1,000 threshold

The Council recommended system-based sanction of eligible excess electronic cash-ledger refunds and clarification that the minimum refund threshold of ₹1,000 applies to the aggregate amount across CGST, SGST/UTGST and IGST rather than separately by tax head.

Both measures remain subject to the applicable legal implementation.

3. ITC: potential savings, subject to eligibility

Input-service ITC from 1 November 2026

The Council recommended allowing refunds of eligible accumulated input-service ITC in inverted-duty cases for credit availed on or after 1 November 2026.

Manufacturers with substantial service expenditure should prepare a separate credit schedule and verify the prescribed refund calculation. The proposal does not make all accumulated ITC refundable.

Capital-goods ITC from 1 April 2027

The Council recommended refund eligibility for specified accumulated capital-goods ITC in zero-rated and inverted-duty cases, with the refund spread over 60 months and applying to credit availed on or after 1 April 2027.

Businesses making significant investments in plant and equipment should maintain asset-wise records of invoices, credit availed, business use and applicable reversals.

Health and life insurance

The Council recommended removing specified restrictions on ITC for health and life insurance.

For example, a premium of ₹1 crore before GST, taxed at 18%, carries a GST component of ₹18 lakh. This is the potential credit involved, not an immediately admissible claim. The actual benefit will depend on the final statutory provisions and the nature of the policy.

Employers should quantify group and employer-policy expenditure separately and retain the existing treatment until the relaxation takes effect.

Infrastructure, free samples and expired goods

The Council also recommended relaxation of specified ITC restrictions relating to telecommunication towers, pipelines outside factory premises, outdoor catering, free samples and goods destroyed or written off on expiry of shelf life as required by law.

The final wording is critical. The proposal should not be treated as blanket permission to claim credit for every asset, commercial write-off, loss or disposal.

Business action: Identify the expenditure involved, quantify the GST and preserve invoices, inventory records and supporting statutory documentation. Claim credit only when the applicable provision permits it.

4. Litigation and penalties: distinguish proposed relief from current law

The ₹10,000 threshold

The Council recommended a minimum threshold of ₹10,000 for specified tax demands, aggregating CGST, SGST/UTGST, IGST and cess, together with transitional treatment for qualifying pending notices and appeals.

A demand of exactly ₹10,000 is not below the proposed threshold. The treatment of wrongly availed ITC, interest, late fees and penalties must follow the final provision.

Business action: Identify small demands and pending appeals by tax amount, statutory provision and stage of proceedings. Continue meeting existing response and appeal deadlines until the relevant amendment takes effect.

Reduced penalty in qualifying non-fraud cases

The Council recommended a reduced penalty of 5% in specified non-fraud cases where tax and interest are paid within the prescribed period following the adjudication order—30 days under Section 73 or 60 days under Section 74A, as applicable.

The benefit is conditional. Payment alone should not be assumed to secure the reduced penalty without satisfying the final statutory requirements.

Proposed changes to arrest and prosecution

The Council recommended omission of Section 69 of the CGST Act and an increase in the prosecution threshold from ₹1 crore to ₹5 crore, alongside narrowing specified offences under Section 132.

If implemented, these changes could materially alter GST enforcement. Until then, existing statutory provisions continue to apply. The proposals should not be described as current immunity from arrest or blanket decriminalisation of fraud.

Businesses facing investigations should obtain case-specific advice under the law currently in force.

Appeal pre-deposit and multi-year notices

The Council recommended a ₹40 crore ceiling on pre-deposit in specified penalty-only appeals where no tax demand is involved, subject to implementation.

It also recommended a validation clause for notices held invalid by courts because they covered multiple financial years. Taxpayers relying on this procedural objection should examine the final provision, limitation, procedural history and merits for each financial year before deciding their next step.

5. Export of services: review the transaction before changing treatment

The Council recommended changes intended to facilitate export treatment in specified cross-border service arrangements, including certain overseas-branch situations and services involving goods made physically available by the recipient. It also recommended clarification concerning specified supplies delivered to overseas buyers in SEZ/FTWZ arrangements.

These proposals may be relevant to GCCs, IT/ITeS businesses, testing and repair providers, and manufacturers using overseas-buyer or warehousing arrangements.

A foreign customer does not automatically make a supply an export of services. The applicable export conditions, place-of-supply rules, payment requirements and final amendments remain decisive.

Business action: Review contracts, the identity of the recipient, service-delivery arrangements, overseas branches and payment evidence before changing GST treatment.

6. Returns, registration and compliance

Return alignment: The proposed mechanism seeks to align GSTR-3B liability and ITC with GSTR-1/GSTR-1A/IFF and GSTR-2B from the proposed April 2027 return period. Finance and IT teams should begin reconciliation and ERP-readiness testing now.

E-commerce registration: A simplified registration mechanism has been recommended for eligible small suppliers of goods selling through e-commerce operators in States or Union Territories where they have no physical presence, subject to prescribed conditions. Businesses should await the operative framework before relying on the facility.

Annual Return Quarterly Payment scheme: The Council approved an in-principle concept note for an optional scheme for eligible B2C taxpayers with turnover up to ₹5 crore. This does not, by itself, make the scheme operational.

E-way bill interception: The Council recommended restrictions on interception and specified authorisation requirements. Until implementation, businesses must comply with existing e-way bill and transport-document requirements.

7. What businesses should do in the next 30 days

Business	Priority action
Exporters	Identify Rule 96(10) disputes and quantify potential refund effects
Inverted-duty manufacturers	Prepare input-service ITC records before 1 November 2026
Capital-intensive businesses	Establish asset-wise ITC schedules ahead of the proposed April 2027 mechanism
Employers and infrastructure businesses	Quantify potential ITC under the proposed Section 17(5) changes
Taxpayers with notices or appeals	Identify potentially covered small demands without missing existing deadlines
GCCs and service exporters	Review contracts, place of supply, branches and payment evidence
Finance and IT teams	Prepare for proposed April 2027 return alignment
E-commerce sellers and MSMEs	Assess eligibility for proposed facilities and await operative rules

CA S.Ahuja Perspective

The most valuable GST reform is not necessarily the one with the biggest headline. It is the one that changes a business’s actual cash flow, tax cost or exposure to litigation.

For exporters, that may mean faster refunds or relief from a historical restriction. For manufacturers, it may mean recovery of credit that has remained blocked. For taxpayers facing disputes, it may mean a change in penalty exposure or transitional relief. For MSMEs, it may mean simpler compliance.

But the financial benefit will arise only when the business identifies the correct provision, establishes eligibility and acts at the right time.

Identify the relief. Establish whether it is retrospective or prospective. Verify the commencement date. Preserve the evidence. Then act.

Do not assume that every GST Council recommendation applies to the past—or that a proposed future benefit can be claimed today.

Legal-status note: This article discusses recommendations made at the 57th GST Council meeting on 8 October 2026 and related official clarifications. The operative legislation, notifications, circulars and transitional provisions must be verified before acting on any proposed benefit. This article is for general information and does not replace advice based on the facts of an individual case

Startup Share-Issue Expenses: What Is Deductible, What Must Be Capitalised, and Can GST Credit Be Claimed

By CA Surekha Ahuja

A startup raises ₹5 crore through a private placement and incurs legal, valuation, company-secretarial, ROC and placement-agent fees. Can these costs be deducted from taxable profits? Can they be written off over five years? Can the GST paid on these services be claimed as input tax credit?

The answer depends on the transaction, the nature of each expense and the specific statutory provision. Costs directly attributable to issuing fresh equity are generally capital expenditure and are not deductible under Section 34 of the Income-tax Act, 2025. Section 44 permits amortisation only of specified expenditure satisfying its conditions. GST input tax credit requires a separate analysis under Sections 16 and 17 of the CGST Act, 2017.

The distinction matters because a genuine business expense is not necessarily a tax-deductible expense.

1. Start with the transaction

Expenditure	General treatment
Private placement, seed funding or VC round	Direct equity-issue costs are capital; no general deduction under Section 34
IPO or FPO	Specified public-issue expenses may qualify for amortisation under Section 44
QIP	Eligibility requires separate examination of the statutory conditions and judicial precedents
Increase in authorised capital for a fresh issue	Capital expenditure
Bonus issue	Revenue treatment supported by Supreme Court authority
Bank loan or other borrowing	Borrowing costs are generally revenue expenditure, subject to applicable provisions
Routine annual secretarial and compliance services	Generally deductible as revenue expenditure, where incurred for business purposes

Where an invoice covers both share-issue work and routine compliance, obtain a proper service-wise breakup. The invoice heading alone does not determine the tax treatment.

2. Why private-placement expenses are not deductible

The Supreme Court has settled the central principle: expenditure incurred to issue fresh shares and increase a company’s capital is capital expenditure, even if the funds are required for business operations.

In Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC), the Court held that expenditure incurred in connection with a fresh share issue was capital in nature.

The distinction is reinforced by two other decisions:

• Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC): ROC fees for increasing authorised share capital are capital expenditure.

• India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC): expenditure incurred to raise a loan is distinguishable from expenditure incurred to issue fresh equity.

A startup cannot claim a deduction merely because the money raised is used for salaries, marketing, product development or working capital. The purpose for which the funds are ultimately used does not, by itself, change the capital character of the share-issue expenditure.

Practical treatment: Direct costs of a private equity round should generally be excluded from the Section 34 deduction. If charged to the profit and loss account, they should ordinarily be added back in the tax computation.

3. When does Section 44 allow five-year amortisation?

Section 44 of the Income-tax Act, 2025, corresponding broadly to Section 35D of the 1961 Act, is a limited statutory relief. It does not permit every capital expense incurred in raising funds to be written off over five years.

For companies, the relevant categories include specified incorporation expenses and certain costs of an issue of shares or debentures for public subscription.

The public-issue category covers specified expenditure such as:

• Underwriting commission.

• Brokerage.

• Charges for drafting, typing and printing the prospectus.

• Prospectus advertising expenses.

The claim remains subject to the applicable conditions, including the nature of the expense, the relevant commencement or expansion requirements, the statutory ceiling and the prescribed period of deduction.

The five-year treatment is therefore not available merely because an expense relates to an IPO.

What about QIP expenses?

A QIP requires a separate legal assessment.

In Yes Bank Ltd. v. DCIT (2020) 183 ITD 721 (Mumbai ITAT), the Tribunal allowed a claim under the former Section 35D on the facts before it, considering the public character of the QIP.

The decision is relevant but should not be treated as a blanket entitlement. The statutory conditions and the nature of each expense must be examined before claiming amortisation.

Is Form 5 required?

Form 5 under the Income-tax Rules, 2025, relates to the statement prescribed for qualifying preliminary expenditure under Section 44(2)(a). It is not a universal filing requirement for every Section 44 claim.

The applicable filing requirement and deadline should be verified for the relevant tax year.

4. Accounting treatment is separate from tax deductibility

For companies following Ind AS, qualifying incremental costs directly attributable to an equity transaction are generally deducted from equity under Ind AS 32, net of the related tax benefit where applicable. Costs of an abandoned equity transaction are recognised as an expense.

For companies following the applicable Accounting Standards, the treatment must be determined under the relevant framework. Section 52(2)(c) of the Companies Act, 2013 permits securities premium to be applied towards writing off specified expenses of an issue of shares or debentures.

The accounting entry does not decide the tax deduction. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), the Supreme Court confirmed that accounting treatment does not determine tax liability.

Accordingly:

• A capital expense debited to the profit and loss account does not become deductible merely because it has been written off.

• An expense adjusted against securities premium must still be examined independently under the Income-tax Act.

• A capital cost cannot be converted into a depreciable asset merely by recording it as one.

5. GST: can input tax credit be claimed?

The issue of shares is not itself a supply of goods or services under the CGST Act. However, the professional services purchased for a share issue may attract GST.

The GST treatment of the service and the eligibility to claim input tax credit are separate questions.

Expense	GST point
CA, CS, valuation and investment-banking fees	Generally taxable at the applicable rate
Legal services	Examine the applicable reverse-charge provisions and exemptions
ROC fees	Verify whether the particular fee falls within the relevant exemption
Stamp duty	A statutory levy, not consideration for a taxable professional service
Foreign legal or advisory services	Examine import-of-services conditions and IGST reverse charge

The ITC issue

Sections 16 and 17 of the CGST Act govern input tax credit and its restrictions.

In Gujarat Narmada Valley Fertilizers & Chemicals Ltd., the Gujarat AAAR, by order dated 22 September 2025 in Appeal No. GUJ/GAAAR/APPEAL/2025/17, denied ITC on expenses connected with a share buyback and addressed reversal of common credit.

That decision concerned a buyback, not a fresh issue. The distinction is relevant, but it does not by itself establish that ITC on fresh share-issue expenses is admissible.

Before claiming material credit, the company should document the service received, its business use, compliance with Section 16, the effect of Section 17 and any applicable common-credit reversal.

Practical approach: Do not assume that ITC is automatically available because the service supports the business. Equally, do not treat a ruling on a buyback as automatically deciding every fresh-issue case. The position should be assessed and documented on its facts.

6. What the CFO should do before closing the funding round

Maintain one expense schedule that identifies:

• The transaction and the purpose of each service.

• The invoice amount, GST particulars and vendor.

• The distinction between equity-issue costs, borrowing costs and routine business expenses.

• The accounting treatment and the corresponding tax adjustment.

• The statutory basis for any Section 44 claim, including the applicable ceiling and filing requirements.

• The GST and ITC position, including reverse charge, exemptions and common-credit reversal.

This exercise should be completed before finalising the financial statements, income-tax computation and GST returns.

A funding round can bring cash into the business without creating a corresponding tax deduction for the cost of raising it.

For a private placement, the starting point is clear: direct costs of issuing fresh equity are generally capital expenditure. Section 44 offers limited relief for specified expenditure, not a general five-year write-off for fundraising costs. GST credit must be assessed independently.

Classify the transaction first, establish the tax treatment second, and document the GST position separately. That is the practical way to avoid an unsupported deduction, an incorrect accounting adjustment or a disputed input tax credit claim.

Form 138 and Form 140: TDS Returns Can Now Be Filed Directly on TRACES. What Is Easier, and What Is Not

 By CA Surekha S Ahuja

The TDS statement for July to September 2026 is due on 31 October 2026. For Tax Year 2026-27, salary TDS is reported in Form No. 138 and non-salary TDS on payments to residents in Form No. 140.

But the bigger change is procedural.

From Q2 onwards, these statements can be prepared, validated and filed directly inside the deductor's TRACES login.

For the online route, there is no need to first prepare a separate return file, validate it through a separate utility and then upload it.

The new workflow is:

TRACES login → select form → import challans → enter/upload deductees → map challans → validate → e-verify → file

This is particularly useful for short returns and also provides better pre-filing controls for larger statements.

What has changed?

The Income-tax Act, 2025 came into effect from 1 April 2026, with new TDS/TCS statement numbers.

New form	Earlier form	Broad purpose
Form 138	24Q	TDS on salary and specified senior-citizen cases
Form 140	26Q	TDS on payments other than salary to residents
Form 143	27EQ	Tax collected at source
Form 144	27Q	TDS on specified payments to non-residents

The quarterly due dates remain:

Quarter	Period	Due date
Q1	April–June 2026	31 July 2026
Q2	July–September 2026	31 October 2026
Q3	October–December 2026	31 January 2027
Q4	January–March 2027	31 May 2027

Statements relating to FY 2025-26 and earlier years continue under the old forms through the old compliance framework. The new online facility should therefore be understood as part of the new Tax Year 2026-27 regime.

What is genuinely easier?

Stage	Earlier route	New online TRACES route
Preparation	Separate return utility	Direct online entry
Challans	Manual entry	Import available unconsumed challans/BINs
Deductees	Utility entry	Online entry or CSV bulk upload
Mapping	Checked through return processing	Difference visible before filing
Validation	Separate validation step	Validate Statement on portal
Verification	Separate filing cycle	Aadhaar OTP or DSC in the same workflow
Draft	Outside portal	Save and resume
Review	Mainly outside system	Admin/Sub-User workflow

Why short returns gain most

Consider a company with a few professional-fee, contractor, rent and commission payments.

Earlier, even a ten-record statement required preparation of a complete return file.

Now the deductor can:

import challans → enter the deductees → map → validate → e-verify.

For larger statements, the same workflow can be combined with bulk upload.

Challan import: a real practical improvement

Available unconsumed challans/BINs can be imported, avoiding repeated entry of BSR code, challan serial number, date and amount.

Where permitted, a challan can also be added manually.

But:

Imported does not mean reconciled.

The deductor must still verify that the challan relates to the correct period and liability.

For government deductors, BIN-related provisions apply separately.

Deductee entry and bulk upload

A small return can be entered record by record.

For multiple deductees, the prescribed CSV bulk-upload facility is more efficient.

The data includes, as applicable:

• PAN and name

• section code

• date of payment or credit

• amount paid or credited

• TDS deducted

• date of deduction

• relevant certificate and other form-specific particulars

The convenience is procedural; responsibility for correct data remains with the deductor.

Challan mapping is an important new control

After deductee entry, records are mapped against the relevant challans. The portal shows:

Challan amount → mapped amount → difference

This allows a mismatch to be identified before filing.

The practical reconciliation should be:

TDS in books = TDS deducted = TDS reported = TDS deposited = TDS mapped

If these do not agree, stop and reconcile.

What has NOT become easier?

The interface is easier. The substantive TDS responsibility is not.

The deductor remains responsible for the correct:

• section and rate

• threshold, wherever applicable

• PAN treatment

• date of payment or credit

• amount on which tax is deductible

• timing of deduction and deposit

• challan and deductee reporting

E-verification must be planned

Do not wait until the due date to discover that Aadhaar linkage or DSC registration is incomplete.

The authorised person should have the required Aadhaar-linked mobile or registered DSC arrangements ready in advance.

A filed statement cannot simply be edited

Once submitted, an incorrect statement cannot be reopened and changed.

A correction statement has to be filed through the prescribed process.

The validation screen is therefore the last practical opportunity to catch errors before filing.

Not every non-salary payment is automatically Form 140

Form allocation depends on the relevant provision, payment and deductee.

Particular care is required for non-resident payments, for which Form 144 may apply.

The utility route still exists

The new online route does not mean that the utility-based process has disappeared.

The new forms also have preparation and validation utilities. Large-volume deductors or entities whose payroll/accounting systems already produce structured files may continue to prefer that route.

The real improvement is a simpler online option, not the abolition of every other filing method.

Before you start

Keep ready:

• active TAN and TRACES login

• registered mobile/email access

• challan details or available unconsumed challans

• deductee-wise payment data

• PAN and section details

• payment/credit and deduction dates

• relevant certificate details

• bulk CSV, if required

• Aadhaar OTP or registered DSC for e-verification

Also check the deductor and Responsible Person details in the TRACES profile before starting.

How to file Form 138 or Form 140

The practical sequence is:

1. Log in
Enter TAN and complete portal authentication.

2. Open filing
Go to e-File & View → File TDS/TCS Forms & Statements and select Form 138 or Form 140.

3. Select the statement
Choose Tax Year 2026-27 → Q2 → Regular → Prepare & File Online.

4. Check pre-filled details
Verify deductor and Responsible Person particulars. Correct the TRACES profile first if required.

5. Import/add challans
Import available unconsumed challans/BINs or add a challan manually where permitted.

6. Enter/upload deductees
Enter individual records or upload the prescribed CSV.

7. Map challans
Map deductees against challans and resolve any difference.

8. Validate
Run Validate Statement, correct errors and review the summary.

9. E-verify and file
Use Aadhaar OTP or DSC, as applicable, and retain the acknowledgement/reference generated after submission.

A draft can be saved and resumed, which is useful where preparation and review are done separately.

Form 138 and Form 140 are not identical

The workflow is broadly common, but the data requirements differ.

Form 138 is principally the salary statement and has additional salary/pension reporting requirements in the relevant quarter, including additional Q4 annexures.

Form 140 covers non-salary payments to residents and therefore contains payment-specific deductee fields.

The forms should not be treated merely as renamed versions of 24Q and 26Q. The applicable section and transaction type still determine what must be reported.

Admin and Sub-User: useful for firms

The new workflow also provides an internal-control advantage.

A Sub-User can prepare and validate, while the Admin reviews, e-verifies and files.

The practical sequence becomes:

Staff prepares → staff validates → principal reviews → principal e-verifies

A draft can also be sent back for correction before final submission.

For CA firms, this provides delegation without giving up final filing control.

Six checks before the final click

1. Challan balance — reconcile the portal balance with books and actual deposits.

2. PAN — check invalid or inoperative PANs.

3. Section and rate — a technically successful upload can still contain an incorrect deduction.

4. Mapping — ensure every deductee is appropriately mapped.

5. E-verification — confirm Aadhaar/DSC readiness before the due date.

6. Final reconciliation —

Books = TDS working = challans = deductee statement = mapped TDS

This is the most important control in the process.

A separate October 2026 change: Property purchased from an NRI

Another important TDS change took effect from 1 October 2026, but it should not be confused with quarterly Form 138/140 filing.

Where a resident individual or HUF purchases immovable property from a non-resident, the buyer no longer needs to obtain a TAN merely for this TDS obligation.

The process has moved towards a PAN-based mechanism, reducing a significant procedural burden.

But:

Removal of TAN does not remove the tax obligation.

The buyer must still determine the applicable withholding provision and rate for payment to a non-resident. This is a procedural simplification, not a change in the substantive tax treatment of the NRI seller.

The transaction has its own prescribed reporting mechanism and should not be mixed with the quarterly Form 138/140 statement.

CA S.Ahuja Perspective

The real TDS change is not 24Q becoming 138 or 26Q becoming 140.

It is the ability to move from preparation to filing through one online TRACES workflow.

That means less duplication, less manual challan entry and an earlier opportunity to identify mismatches.

But the fundamental responsibility remains unchanged.

Before filing, the deductor should be able to answer four questions:

Was the correct tax deducted?
Was it deposited correctly?
Was it reported against the correct deductee?
Does the statement reconcile with the books?

If the answer to all four is yes, the new TRACES facility does what it is intended to do:

make compliance easier without making the underlying control weaker.

For Q2 2026-27, the immediate deadline is 31 October 2026.

MSME Payments: TReDS, Factoring or Bank Finance — What Is Legally Safe, What Does It Cost and Who Bears the Risk

 By CA Surekha S Ahuja

A buyer wants 60 days. A Micro or Small supplier needs money in 10. Financing can bridge that gap.

But financing does not automatically rewrite the buyer’s statutory payment obligation.

That is the starting point for evaluating TReDS, factoring, invoice discounting, bank finance and supply-chain finance.

The real issue is not the financing product

Under Section 15 of the MSMED Act, a buyer must pay within the period agreed in writing or, where there is no written agreement, within 15 days of acceptance. A written agreement cannot provide more than 45 days from acceptance or deemed acceptance.

The statutory clock is linked to acceptance of goods or rendering of services, not simply to the invoice date, internal approval or uploading an invoice on a financing platform.

For covered delayed payments, Section 16 provides compound interest with monthly rests at three times the RBI Bank Rate. Section 23 makes such MSMED interest non-deductible for income-tax purposes.

From 1 April 2026, the corresponding income-tax provision is Section 37(2)(g) of the Income-tax Act, 2025. Delay can therefore create:

interest cost + tax deduction deferral + financing cost.

Financing should be arranged before statutory default, not used to postpone it.

Figure 1: How the statutory payment date is fixed

Who is the supplier?

The MSMED payment regime applies where the supplier falls within the statutory coverage. Buyer controls should therefore verify Udyam status, category and applicability for the relevant supply.

From 1 April 2025:

•      Micro: investment up to ₹2.5 crore and turnover up to ₹10 crore

•      Small: investment up to ₹25 crore and turnover up to ₹100 crore

•      Medium: investment up to ₹125 crore and turnover up to ₹500 crore

Section 15 protects Micro and Small suppliers. Medium enterprises are outside it.

Financing changes the fund flow — not necessarily the legal obligation

The first question should not be “TReDS or factoring?”

It should be:

Who needs liquidity, who funds it, who bears the cost, who ultimately receives payment, and when is the buyer’s statutory obligation discharged?

TReDS

TReDS provides an electronic mechanism for financing MSME trade receivables. The MSME can obtain early payment from a financier, while the buyer settles the receivable with the financier on the agreed due date.

The supplier’s liquidity problem is therefore addressed without necessarily changing the buyer’s underlying payment obligation.

Figure 2: Who pays whom on TReDS

Factoring or assignment

Factoring can transfer the receivable to a financier. But assignment does not automatically extend the payment period.

Section 14 of the Factoring Regulation Act preserves the MSMED payment framework for receivables of Micro or Small enterprises. Assignment may change who receives the money; it does not automatically change when the amount is legally payable.

Bank, NBFC or fintech finance

The buyer may finance its working capital and pay the supplier on time. Alternatively, the supplier may discount the receivable.

The legal and tax result depends on the actual structure—not merely on whether the product is called vendor finance, invoice discounting, supply-chain finance or platform finance.

Two transactions that look similar but are not

Supplier seeks early cash: A ₹10 lakh invoice is discounted by a financier and the buyer pays the financier on the agreed due date. This is principally financing a receivable.

Buyer finances an overdue payment: The statutory due date passes and the buyer subsequently arranges finance to settle the amount.

That is fundamentally different.

Financing the overdue amount does not automatically cure the original default.

Figure 3: Financing a receivable compared with financing a delay

The cost of delay can exceed the financing cost

Illustratively, on ₹1 crore for 45 days:

Route	Illustrative cost
TReDS at 8.75%	₹1.08 lakh
Bank finance at 9.5%	₹1.17 lakh
Buyer borrowing at 10%	₹1.23 lakh
Fintech at 11.5%	₹1.42 lakh
NBFC at 15%	₹1.85 lakh
Statutory interest at illustrative 16.5%	₹2.03 lakh

 

These are illustrations, not prescribed or market rates. The financing costs are ordinarily deductible business expenses; the statutory interest is not.

The cheapest compliant financing may be far cheaper than financing a statutory default.

TDS: interest, discounting and finance charges are not the same thing

“Finance charge” is not itself a TDS category.

The correct analysis is:

What is the payment? Who receives it? Who bears it? What is its legal character? Which TDS provision applies?

Interest

Where the amount is genuinely interest, Section 194A of the Income-tax Act, 1961, or the corresponding Section 393 framework of the Income-tax Act, 2025, may apply, subject to the payer, payee, threshold and specific exclusions.

Interest paid to a banking company is subject to specific exclusions under the TDS framework. Interest paid to other specified financiers may attract TDS where Section 194A/Section 393 applies.

Receivable discounting

A discount on assignment or discounting of a receivable is not automatically the same as interest merely because the financier deducts it from the amount funded.

Its treatment depends on the substance of the transaction—whether there is an actual assignment/purchase of the receivable, the rights and recourse of the financier, the nature of the return and the contractual arrangement.

Therefore, do not deduct TDS mechanically on every amount described as “discounting charges”.

At the same time, the label “discount” cannot by itself establish that TDS is not applicable. The documentation and actual transaction must support the characterization.

Platform, processing and other finance-related charges

A separate platform, processing, documentation, administration, brokerage or other service charge requires independent classification.

It should not automatically be treated as interest. Equally, it does not automatically become Section 194C payment merely because it is called a “finance fee”.

The applicable TDS provision must follow the legal character of the payment, not its commercial label.

The Income-tax Act, 2025 consolidates the earlier TDS provisions into Section 393 tables, with the underlying TDS rates and thresholds broadly retained.

Figure 4: Classifying each charge before deciding TDS

Settlement statements must separate the components

A financing settlement should, wherever applicable, separately identify:

Invoice value → discount/interest → platform/processing charges → GST, if applicable → TDS, if applicable → supplier receipt → financier funding → buyer’s final settlement.

This prevents the common error of treating every deduction as interest—or every finance-related fee as subject to the same TDS provision.

GST requires the same discipline

Financing consideration may have a different GST treatment from platform, processing, documentation, administration or broking charges.

Do not assume that the entire settlement statement is exempt merely because the transaction relates to financing.

Classify each charge separately.

Who should bear the financing cost?

If the supplier chooses early payment for its own liquidity, the discounting cost may ordinarily be a supplier-side commercial cost.

If the buyer wants the supplier paid early, the commercial arrangement may justify the buyer bearing the cost.

If the buyer simply wants to extend payment beyond the statutory period, financing should not be used to shift the economic burden of that delay onto the supplier without careful legal and contractual review.

The question is:

What was agreed, who received the financing benefit, and what does the underlying law permit?

Which route makes sense?

Situation	Starting point
Supplier does not need early cash	Normal timely payment
Supplier needs early liquidity	TReDS / factoring / receivable discounting
Buyer wants supplier paid early	Reverse factoring / supply-chain finance
Buyer needs working capital	Bank finance + timely supplier payment
Buyer wants credit beyond statutory period	Legal review before structuring
Invoice is already overdue	Regularise default; financing is not a cure

 

Figure 5: Choosing the route for an MSME invoice

Five questions before signing

1.       Is early cash genuinely required?

2.       What is the statutory payment date?

3.       Who is the actual financier and is there recourse?

4.       What exactly is each charge—interest, discount, commission or service fee—and what TDS/GST treatment follows?

5.       Can the transaction be reconciled from invoice to final settlement?

If these answers are not clear, the structure is not ready.

Year-end control

From February onwards, buyers should maintain an invoice-level report showing:

supplier/Udyam status | acceptance date | statutory due date | amount | financing route | financier | funding date | settlement date | interest/default status

This is particularly important at year-end because payment status can affect statutory interest and tax deduction.

Retain Udyam evidence, purchase terms, delivery/acceptance records, financing or assignment agreement, recourse terms, financier identity, settlement statement, TDS/GST workings, payment evidence and final reconciliation.

CA S.Ahuja Perspective

TReDS, factoring, invoice discounting and supply-chain finance sit at the intersection of MSMED law, factoring law, contracts, treasury, income-tax, GST and accounting.

The wrong question is: “Which financing route has the lowest rate?”

The better question is:  “Which structure gives the supplier liquidity, gives the buyer commercially sensible funding, and keeps the statutory payment obligation clearly within the law?”

The real distinction is between financing a receivable and financing a delay.

Finance the liquidity problem. Do not finance the statutory default.

For the CFO or business owner:  Pay the right party, through the right structure, at the right time, at a total cost that can be defended.