Impact of coronavirus threat and restrictions on Indian companies: legal and regulatory changes

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last updated on 25 March 2020 | reading time approx. 5 minutes

 

India has put in place strict restrictions to combat coronavirus. On March 24, 2020 the Government of India took extraordinary measures to further contain the spread of COVID-19 and enforced a complete lockdown across the nation. For many, this lockdown is a “Once In a Lifetime Event” and will severely impact economic activities, small and medium businesses, supply chains, etc. To minimize some of the advert effects of the lockdown and other restraining measures, the Central as well as State Governments introduced new compliances and regulatory changes which shall help the companies to survive this economic shock. The latest tax, legal and compliance changes are summarized below.

 

 

Announcement on regulatory relaxations during the lockdown

The Indian Finance Minister, Mrs. Nirmala Sitharaman has released a Press Note as on March 24 2020 with various relaxation efforts in order to ease the tensions of missed deadlines under different statutory authorities and schemes. The necessary circulars and legislative amendments will be issued with regard to the reliefs discussed in the Press Note to bring the same into effect. The highlights of the Press Note has been provided here:
 

Income Tax

  • The last date for filing Income Tax returns for Financial Year 2018-19 has been extended from March 31, 2020 to June 30, 2020. Similarly, the mandatory requirement to link Aadhaar number with PAN (Permanent Account Number) by March 31, 2020 has been extended till June 30, 2020.
  • Due dates for issue of notice, intimation, notification, approval order, sanction order, filing of appeal, furnishing of return, statements, applications, reports, any other documents and time limit for completion of proceedings by the authority and any compliance by the taxpayer including investment in saving instruments or investments for roll over benefit of capital gains under Income Tax Act, Wealth Tax Act, Prohibition of Benami Property Transaction Act, Black Money Act, STT law, CTT Law, Equalization Levy law, Vivad Se Vishwas law where the time limit is expiring between March 20, 2020 to June 29, 2020 shall be extended to June 30, 2020.
  • For delayed payments of advanced tax, self-assessment tax, regular tax, TDS, TCS, equalization levy, STT, CTT made between March 20, 2020 and June 30, 2020, reduced interest rate at 9% instead of 12 % or 18 % per annum ( i.e. 0.75% per month instead of 1 or 1.5 percent per month) will be charged for this period. No late fee/penalty shall be charged for delay relating to this period. This provides the respite needed by corporates who are facing issues with work from home mode in terms of completing the required tax deadlines.

 

GST/ Indirect Tax

  • The due dates for filing of GSTR-3B returns for the months of March, April and May 2020 will be extended till June 30, 2020.
  • For taxpayers having aggregate annual turnover less than INR 50 million, interest, late fee, and penalty will be fully waived.
  • For taxpayers having aggregate annual turnover more than INR 50 million, the interest will be waived for payments delayed up to 15 days where as a reduced rate of interest @ 9% per annum will be charged beyond that period (current interest rate is 18% per annum). No late fee and penalty to be charged, if the compliance is undertaken before the last week of June 2020.
  • Date for opting for composition scheme is extended till June 30, 2020. Further, the last date for making payments for the quarter ending March 31, 2020 and filing of return for 2019-20 by the composition dealers will be extended till June 30, 2020.
  • Due date for issue of notice, notification, approval order, sanction order, filing of appeal, furnishing of return, statements, applications, reports, any other documents, time limit for any compliance under the GST laws where the time limit is expiring between March 20, 2020 to June 29, 2020 shall be extended to June 30, 2020.
  • Payment date under Sabka Vishwas (Legacy Dispute Resolution Scheme), 2019, which is a scheme introduced to resolve Service Tax and Central Excise related disputes, shall be extended to June 30, 2020. No interest for this period shall be charged if the tax dues are paid by June 30, 2020.

 

Customs

  • It is proposed to include the activity of Customs clearance under the list of ‘essential services’ and therefore, customs clearance of imported goods would be carried out 24X7 till June 30, 2020.
  • Due date for issue of notice, notification, approval order, sanction order, filing of appeal, furnishing applications, reports, any other documents etc., time limit for any compliance under the Customs Act and other allied Laws where the time limit is expiring between March 20, 2020 to June 29, 2020 shall be extended to June 30, 2020.

 

Corporate Affairs

  • No additional fees shall be charged for late filing during a moratorium period from April 1, 2020l to September 30, 2020, in respect of any document, return, statement etc., required to be filed in the MCA-21 Registry, irrespective of its due date, which will not only reduce the compliance burden, including financial burden of companies/ LLPs at large, but also enable long-standing non-compliant companies/ LLPs to make a ‘fresh start’;
  • The mandatory requirement of holding meetings of the Board of the companies within prescribed interval provided in the Companies Act (120 days), 2013, shall be extended by a period of 60 days till next two quarters i.e., till September 30, 2020;
  • Applicability of Companies (Auditor’s Report) Order, 2020 shall be made applicable from the financial year 2020-2021 instead of from 2019-2020 as notified earlier. This will significantly ease the burden on companies & their auditors for the year 2019-20.
  • As per Schedule 4 to the Companies Act, 2013, Independent Directors are required to hold at least one meeting without the attendance of Non-independent directors and members of management. For the year 2019-20, if the Independent Directors of a company have not been able to hold even one meeting, the same shall not be viewed as a violation.
  • Requirement to create a Deposit reserve of 20% of deposits maturing during the financial year 2020-21 before April 30, 2020 shall be allowed to be complied with till June 30, 2020.
  • Requirement to invest 15% of debentures maturing during a particular year in specified instruments before April 30, 2020, may be done so before June 30, 2020.
  • Newly incorporated companies are required to file a declaration for Commencement of Business within 6 months of incorporation. An additional time of 6 more months shall be allowed.
  • Non-compliance of minimum residency in India for a period of at least 182 days by at least one director of every company, under Section 149 of the Companies Act, shall not be treated as a violation.
  • Due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19, it has been decided to raise the threshold of default under section 4 of the Insolvency and Bankruptcy Code (“IBC”), 2016 to INR 10 million (from the existing threshold of INR 100 thousand). This will, by and large prevent triggering of insolvency proceedings against Medium and Small Scale Enterprises (MSMEs)

 

New Compliance of Web Form CAR for all Companies/ Limited Liability Partnerships (LLPs)

The Ministry of Corporate Affairs (MCA) has released an advisory on March 20, 2020. Through this advisory and with an objective to ensure and generate awareness and confidence on readiness to deal with the situation in India. The MCA has deployed a Web Form for Companies/ Limited Liability Partnerships to confirm their readiness to deal with the threat of COVID-19. The Web Form is named as CAR (Company Affirmation of Readiness towards COVID-19) and  was deployed on March 23, 2020 on the portal of MCA. All Companies/ Limited Liability Partnerships are requested to comply and file the Form CAR.. The MCA has clarified that filing of the said Form is purely voluntary. As such no penalty or enforcement related action is applicable.
 

Board meetings allowed to be held via video conference for three months

The Ministry of Corporate Affairs issued a notification on March 18, 2020 allowing companies to hold board meetings dealing with matters like approval of financial statements as well as books of accounts, approval of the board’s report, decisions on mergers, amalgamation and takeovers, through video conferencing for a period of three months. Earlier, meetings dealing with the said subject matters were required to be held with directors physically attending the meeting. Due to travel restrictions, it is challenging for the companies to stay compliant, hence, this move of MCA  will surely bring huge relief to the companies and they will be able to take important decisions via video conference and stay compliant during these tough times.
 

COVID-19 related expenses recognised as CSR

Since COVID 19 was declared as pandemic by the World Health Organisation and the Government of India treats it as a notified disaster, the Ministry of Corporate Affairs  clarified on March 23, 2020 that spending of CSR funds for COVID 19 related relief work  is eligible CSR activity. Funds may be spent for various activities related to COVID 19 such as promotion of health care and disaster management.
 

Litigation strategies shall be revisited due to restricted functioning by Courts across India

In and around third week of March, 2020 Supreme Court as well as High Courts in several states, including Bombay High Court, notified that they will take only urgent matters. The litigants have to explain and justify the urgency, otherwise the Court can penalize the party (Bombay High Court imposed penalty of INR 15,000 on litigant for insisting on listing of non-urgent matter). There is no end date to the said notifications. However, on March 23, 2020, the Supreme Court of India issued an order stating that the period of limitation for all court proceedings shall be extended with effect from March 15, 2020 till further order by the Court. Thereby, it is expected that the pendency of litigations in India is going to further increase in coming months. Therefore, it is advisable for the companies to revisit their litigation strategy and analyse the impact of delay in dispute resolution.
 

Legal action for knowingly spreading coronavirus

India is invoking a century old law to combat wilful spreading of COVID 19. The wife and father of the COVID 19 infected Google employee in Bangalore have been booked by the police under the Epidemic Disease Act, 1897 for lying to health officials. Additionally, a Police action is also initiated against them under Indian Penal Code sections 269 (negligent act likely to spread infection of disease dangerous to life) and 270 (malignant act likely to spread infection of disease dangerous to life). Similarly, two people were arrested in State of Jammu & Kashmir, on March 19, 2020, for spreading rumours on social media regarding the death of a man due to COVID 19 in town.
 

Force majeure clause during coronavirus

On February 19, 2020, the Indian Government issued Office Memorandum, stating that coronavirus shall be considered as natural calamity and Force majeure clause may be invoked wherever necessary. It is common practise in India to add Force majeure clause in commercial contracts. Therefore, it is high time for businesses to evaluate all commercial contracts with Force majeure clause and initiate appropriate action under the said clause if it is evident that COVID 19 situation will hamper the capacity of either of the parties to contract, to fulfil their legal obligation on time. Options of triggering of Material Adverse Change (MAC) clauses, possibility of re-negotiating contracts for prices/ volume of supply may also be analysed.
 
Further, the financing documents of organisations needs to be checked with a fine tooth comb to identify any covenants which require action/ intimation to lender(s), should the company apprehend a material adverse impact on its financial performance.
 
The present situation may also impact ongoing Mergers & Acquisitions transactions. This necessitates a requirement for the contracting Parties to revisit the transaction documents and take appropriate measures.
 

Review of Insurance Cover

Companies should review the specific insurance cover to identify if mitigating for business losses on account of this pandemic  is covered in their insurance policies. If yes, appropriate steps may be taken in this regard including intimation to insurance company
 

Lockdown for 21 days

As of 25th March, 2020, the whole Republic of India has been put in a lockdown for 21 days, that is, till 15th April, 2020. Failure to comply with this order will invoke criminal proceedings under section 188 of Indian Penal Code (disobedience shall be punished with imprisonment which may extend to six months, or with fine which may extend to one thousand rupees, or with both). Further, all persons violating these containment measures would be liable to prosecuted against as per the provisions of Sec 51 to 60 of the Disaster Management Act, 2005 (fines and imprisonment extending upto 2 years, depending on the offence).
 
The Prime Minister of India, Mr. Narendra Modi, in his address to nation on March 24, 2020 has appealed all citizens to respect the orders and lockdown as needed in order to combat the rising cases of COVID-19 in the country. Central and State Governments all across the country have declared complete “lock-down” in their respective jurisdiction by issuing orders and notifications. In addition these, official notifications also address complete closure of work place, paid leaves and other areas related to employment which is set to have considerable impact on all the businesses across the country. Some of the details are as follows:
 
Lockdown extends to:

  • All offices of Government of India, its autonomous/ subordinate offices and public corporations. All offices of the State/ Union Territory Governments, their autonomous bodies/ corporations shall remain closed. The exceptions are defence, armed forces, police forces, treasury, public utilities (including petroleum, CNG, LPG, PNG), disaster management power generation and transmission units, post offices, home guards, electricity, water, sanitation, municipal bodies where essential services like sanitation, personnel related to water supply, etc is needed,
  • All shops, industrial establishments, commercial establishments, private establishments will be closed or work from home only. Exceptions include all essentials like banks; insurance offices; print and electronic media; telecommunications; internet services; broadcasting and cable services; IT and IT enabled services needed for essential services; e-commerce for delivery of essential goods like food, pharmaceuticals, medical equipment; power generation, transmission and distribution units and services; cold storage & warehousing services; private security services; essential services related to food, groceries. Manufacturing companies where units of essential commodities are being produced are also exempted – all other continuous process production units need permission from State Government.
  • All educational, training, coaching, sporting, academic, cultural, religious institutions/ functions will be closed, including all places of worship, congregations with no exceptions. These include all social/ political/ sports/ entertainment/ academic/ cultural/ religious functions and gatherings will be barred.
  • All transport services – air, rail, roadways, will remain suspended except for transportation for essential goods and fire, law, order & emergency services. Similarly, hospitality services remain suspended except for those hotels, homestays, motels, which are lodging tourists & persons stranded due to the lockdown, medical & emergency staff, air and sea crew. There are no public transport and vehicular movements, except for essential and emergency situations which are to be allowed.

 

Thus, any earlier provisions and notifications which allowed for 50% or less workforce, leave exemptions or any particular exemptions to industries/ establishments which could not provide work from home  has now been completely replaced with the above lockdown provisions. Except for essential services, all establishments must allow work from home or have a complete shutdown during the period of lockdown.
 

Impacts on the duties & responsibilities of the employer and the employees

It is every employer’s duty to provide a safe and hygiene working environment and to do everything reasonably possible to ensure infection prevention. This duty of care is particularly important in times of spread of COVID-19. However, as there are no specific rules on what is meant by this duty of care apart of special laws like the Factories Act, 1948, employers should take proactive measures according to daily updated risk assessments. These include, among other things, authorising all employees to work from home wherever feasible and now with the lockdown provisions, it is mandatory.. If it is not possible in a company to grant work from home as they are part of the exceptions of the essential services,, in addition to the provisions of the Epidemic Disease Act, install safety precautions such as maintaining safety distances between employees, disinfecting and cleaning the workplace regularly, providing safety clothing and masks, keeping temperature checks at the office premises, working in shift and only keeping essential staff available, etc.
 
The employer should ensure that the employees have the required IT infrastructure to work safely from home, especially regarding data protection regulations.
 
The Ministry of Labour & Employment, Government of India has clarified in their notification dated on March 20, 2020, that all employers may be advised to extend their coordination by not terminating their employees or reducing their wages. If any employee takes leave, he should be deemed to be on duty without any consequential deduction. Further, if the place of employment is to be made non-operational, the employee shall be deemed to be on duty.
 
Further, the Governments of Telangana and Karnataka have clarified that employers shall not terminate their employees or reduce their wages. Employers shall grant  their employees Paid Leaves during the lock-down period in case it is not possible for them to work from home.

  

Way Forward

It is difficult to predict whether the lockdown would extend beyond the 21 days period, currently decided. Further, even after lockdown has been lifted, it will be likely lifted in stages in order to prevent further outbreaks and spread. Therefore, the businesses should keep themselves prepared to adapt with any legal or regulatory change introduced by the Government. Currently, the measures being introduced are beneficial as it provides the required 3 months extensions in all regulatory and compliance deadlines and penal provisions being exempted or reduced so that corporates are not faced with additional hurdles, tensions and obligations which they are unable to fulfil due to lockdown measures. In line with other countries, the Indian Government is also expected to announce a larger fiscal stimulus package soon to address the concerns of the economy.
 
It would be prudent for the companies to quickly analyse the contract obligations and determine the exposures due to non-performance, by any of the parties. If the company is not in position to honour the contract due to outbreak of COVID-19  then it should invoke force majeure clause within the prescribed timeframe.
 
COVID 19 threat also exposes business to various labour law related challenges, which can vary as per the nature of business and operation of the company. It is advisable to revisit employment contracts and HR polices to ascertain whether they are properly worded to address the challenges posed for this unusual situation.

  • What are the legal obligations of the employer towards employees if the operations are suspended for few months?
  • Whether the employer is legally authorized to reduce the remunerations by reducing the working hours of employees?
  • What are commercial and labour-law related obligations of the employer in the event of prolonged illness of employee due to COVID 19?
  • Whether the employee has  a right to work-refusal, if he feels that the threat of COVID 19 still persists, in general as well as in specific location, post the lockdown period?

  
The above questions and many more such questions will be faced by companies sooner or later. Therefore, it is advisable to be prepared and compliant in advance.

 
In addition, constantly changing government regulations must be taken into account. Local notifications are regularly issued on short notice, which must be observed by employers. It is therefore inevitable that every employer keeps up to date and thinks about necessary measures in advance so that the company can respond quickly to new situations. 

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