The Ministry of Corporate Affairs (MCA) issued a notification effective August 5, 2022 to amend the Companies (Accounts) Rules, 2014 (Accounts Rules) to provide the following:
- Electronic records should remain accessible in India at all times so as to be usable for subsequent reference;
- Back-up of electronic record should be kept in servers physically located in India on a daily basis; and
- Where the service provider is located outside India, the name and address of the person in control of books of account/other books/papers in India is additionally required to be provided.
In this regard, we have made a representation to MCA highlighting the issues being faced by the industry in complying with these provisions:
- Clarity on documents that require back-ups -
Wide definition of books of accounts and books or papers - Rule 3 of Accounts Rules require a company to make available "books of account" and "other books and papers" in electronic mode accessible in India at all times. Due to lack of clarity on the exact documentation to be kept by companies for complying with this requirement, companies are finding it challenging to determine which systems and documents fall under the definition of 'books of paper', and 'books of accounts'.
With increasing digitisation of business operations, there is a need for clarity on the additional documents that should be kept as backups in digital format within India, beyond the traditional books of accounts. This is important as companies that use global servers to maintain books of accounts will now be required to align their technical and physical infrastructure. This is likely to have cost implications for businesses.
Further, the above definitions are very wide and could be interpreted to mean that a company is required to maintain back-up of every document, paper or transaction which forms part of books of account, on a daily basis. Such an interpretation does not take appear to take into account the materiality and the relevance of the documents and is being considered as disproportionate by the industry.
Companies use multiple software systems to manage different aspects of their business operations - Practically, companies use accounting software that maintain books of accounts, and the underlying transaction details are maintained in ancillary systems (that are standalone systems) or rely on third-party vendors for functions like payroll processing, employee database, payables and compliance. These ancillary systems are then integrated/ consolidated into the main accounting software.
For example, companies may have SAP or Oracle as the main ERP system whereas sales and inventory details could be maintained in another accounting software. There is lack of clarity on whether the ancillary systems will form part of books of accounts and needs to be backed up on a server located in India. If this interpretation is adopted, it will result in maintenance and back up of voluminous data on a daily basis, which could take anywhere between 24 to 72 hours.
Given the lack of guidance on this matter, the documents that require back up are sometimes based on the discretion of the auditors. In case there is a difference in interpretation between a company and the auditor, the auditors mention this fact in his audit report and qualifies the audit report. Given the financial and non-financial consequences, there is a need for clarity on this aspect. Non-compliance with provisions of S. 128 of Companies Act is subject to penalty.
Global Capability Centre (GCC) perspective - GCCs mainly rely on parent entity’s servers, which are generally located outside India, for back-up and retrieval of data pertaining to books of accounts. While the global operations are backed up on a server located outside India, GCC companies ensure that the accounting systems pertaining to Indian operations are accessible in India and available for retrieval of data, inspection, etc. at all times.
However, due to ambiguity surrounding the definition of "books of accounts," there is a concern within this segment of the industry that this term encompasses all upstream systems containing transactional data, such as invoices, receipts, and payroll information. If such interpretation is adopted, the back-up of these documents on local servers in India will require companies to make investment in infrastructure and could diminish the value propositions of GCCs.
Clarity on the purpose of back up – Rule 3 of Accounts Rules require companies to maintain back-up of electronic record in servers physically located in India on a daily basis. There is lack of clarity on the purpose for which back up is required to be maintained in India, i.e., whether it is to help in reconstructing books of accounts in case companies do not have access to a server located outside India or whether authorities want to have access to books of account on a real time basis. If there is clarity on the purpose of maintenance of back up in India, then organisations can accordingly implement solutions which are cost effective.
Companies operating in India already maintain detailed records related to their Indian operations to fulfil regulatory obligations and demonstrate compliance with applicable laws and regulations. These records are readily available to government authorities and regulatory bodies, such as income tax filings, Goods and Services Tax (GST) returns, MCA filings, statutory audits, Employee Provident Fund (EPF) and Employee State Insurance (ESI), etc.
Suggestion – We have requested MCA to provide guidance to companies as well as auditors on the following aspects:
- Guidance on what constitutes “books of accounts” and “books or papers” for the purpose of compliance with the above provisions. The definition should be restricted to core financial accounting module of ERP systems and should exclude ancillary accounting systems. This will help in providing clarity to the industry.
- Ancillary or supporting documents, beyond the core financial accounting module, should be maintained by companies and produced only when required by regulatory authorities or in specific instances of regulatory compliance or in specific instances of regulatory compliance. This approach will ensure that companies focus on maintaining essential financial records while retaining flexibility in managing ancillary documentation. Similarly, the requirement of maintaining audit trail as prescribed under proviso to Rule 3(1) of Accounts Rules should be limited to core finance modules and should not include ancillary systems.
- Time period for retention of daily back-up of electronic records
S. 128(5) of Companies Act require companies to maintain books of account pertaining to 8 financial years along with relevant vouchers. In this regard, companies require clarity on the time period for which daily back-ups should be retained. There is an apprehension within the industry that the requirement applicable to maintenance of books of account under S. 128 would also apply to electronic records maintained under Rule 3 of Accounts Rules, i.e., back-up of electronic records maintained under proviso to Rule 3(5) should also be maintained for at least preceding 8 financial years.
Clarity on this matter is crucial considering that many statutory compliances are done by companies either on monthly, quarterly or annually basis, such as GST returns, ESI, PF returns, TDS returns, corporate income tax return, etc. Maintaining back up of records of 8 years would impose significant operational challenges for companies, resulting in increased cost and compliance burden.
Suggestion – We have requested MCA to provide clarity on the duration for retention of daily back-up of electronic records.
The requirement of maintaining daily back up of electronic records on a server located in India is a business reform and not just a law change. It will involve significant changes to be made to ERP systems, which will require time for end-to-end implementation. In this regard, we have requested MCA to provide clarity on the above aspects. This will enable Industry to make the required changes in their accounting software, in order to be complaint with these provisions. For a smooth and successful implementation of a critical business change of this magnitude, we have suggested MCA to give adequate time to configure and test their ERP/ accounting software from a date post where there is complete clarity regarding the process flow.
We hope you will find the update useful. In case you have any feedback, please write to tejasvi@nasscom.in
