The
recent times have seen a colossal of several tax and regulatory amendments one
after the other. Some of these amendments have been brought directly to the tax
provisions and also at places which has significant ramifications on tax landscape.
The key changes are implementation of IND-AS (and its parallel existence with
the IGAAP regime), introduction of ICDS[1]
in the normal tax provisions and amendments made in MAT provisions of the
Income-tax Act, 1961 (‘the Act’) vis-à-vis
IND-AS. Resultantly, there are changes brought to the way in which accounts are
prepared, scope of tax audits done and in the manner of tax computations and
filings. The existence of different accounting norms at the same time and parallel
application of different tax provisions (normal tax and MAT) thereon opens up a
very interesting mix of ‘tax’ positions.
IND-AS
stand for Indian Accounting Standards, the same are named and numbered in the
same way as corresponding International Financial Reporting Standards (IFRS). We
had for last many years, accounting regime in the form of IGAAP (Indian
Generally Accepted Accounting Practices); several Accounting Standards prescribed
therein and Schedule III of the Companies Act, 2013. However, the Ministry of
Company Affairs (MCA)[2]
announced Companies (Indian Accounting Standard) Rules, 2015 and adopted 39
IND-AS standards. Pursuant to IND-AS, amendments have been brought to the Schedule
III of the Companies Act, 2013. IND-AS has to be followed (in phased manner) by
Companies that are: (i) listed / in process of listing; (ii) net worth of Rs
500 crores or more; or (iii) holding / subsidiary of aforesaid Company. Companies
that do not fall in the above-mentioned categories can continue to follow
IGAAP.
Thus, the
2 Accounting Standards IND-AS and IGAAP exist in parallel and it may happen
that a Company’s financials which are on IGAAP in one particular year translate
to IND-AS in subsequent year.
Under IND-AS,
several new line items would appear in a Company’s Financials as compared to
IGAAP. Resultantly, the IND-AS compliant
financials could reflect different line items and value of profits / loss as compared
to IGAAP. The first time adoption of IND-AS from the IGAAP regime will also
throw up the ‘transition amount’ – arising due to application of IND-AS on
IGAAP financials of earlier years. The application of IND-AS would bring in
significant changes to the accounting policies / practices – for instance,
compulsory application of fair value of ESOP as compared to the option of
intrinsic or fair value provided under IGAAP. IND-AS could also have new
classifications reflected in the financials such as ‘Other Comprehensive
Income’ comprising of prescribed items such as hedging reserve, revaluation
reserve, actuarial gain / loss in respect of employee benefits and others. In
the IND-AS Balance Sheet, ‘Other Equity’ would reflect including pure equity,
reserves and equity component of instruments convertible into equity like Compulsorily
Convertible Debentures. For deferred tax computation, only the Balance Sheet approach
is provided under IND-AS; also it requires inclusion of Effective Tax Reco
(ETR) in Deferred Taxes. Due to IND-AS, certain transactions which would per se be non-existent, but due to
accounting requirement, may appear in financials - for instance, on Preference Shares
(which are issued at below Market Rate of Interest), an ‘interest’ expense
could be recognized in financials relating to its debt component. Such expense would
not exist in real sense & may be construed ‘notional’.
For tax
computation purposes, the tax payer would determine the profit / loss figures as
per IND-AS or IGAAP and would thereby carry out the tax computation. For
determining income and tax under the normal tax provisions, the taxpayer has to
(additionally) consider the impact of Income Computation and Disclosure
Standards (‘ICDS’).
ICDS are
the guidelines introduced to bring consistency in computation and reporting of
taxable income. There are 10 ICDS prescribed which have to be followed for
computation (and disclosure) of income by all taxpayers (other than an
individual or a Hindu undivided family who is not required to get his accounts
of the previous year audited under the Act[3])
following mercantile system of accounting. ICDS has to be followed for
computation of income only under the heads: (a) Profits and Gains of Business
and Profession; and (ii) Income from Other Sources. ICDS is qua normal provisions and tax computation
under MAT provisions remain unaffected by ICDS. ICDS is a very refined version
of the Accounting Standards prescribed by the Authorities earlier[4].
Through the (revised) tax audit report format, even the tax auditor is required
to comment upon a taxpayer’s compliance of ICDS.
ICDS would govern alongwith the normal provisions of
the Act. For instance, in a matter involving capitalization of interest cost
relating to the pre-construction period of an asset, it will have to be
determined in light of Section 36(1)(iii) and Section 43(1) Explanation 8 of
the Act. Additionally, the provisions of ICDS – IX (Borrowing Costs) will have
to be seen and given effect to in terms of determining qualifying asset(s) and
treatment of general/specific purpose borrowings. Similarly, a matter involving
a taxpayer’s receipt of Government Grants would have to be seen as per section
2(24)(xviii) of the Act and ICDS-VII (Government Grants). Likewise, for
depreciation purposes, the value of asset(s) will have to be determined as per
section 43 / 43A of the Act alongwith provisions of ICDS-V (Fixed Assets). In
case of conflict between the Act and ICDS, the Act will prevail. However, in respect
of the authority of case-laws over ICDS, it has been clarified[5]
that ICDS shall be applicable to the transactional issues dealt therein in
relation to AY 2017-18 and subsequent AYs. ICDS does not require separate books
of accounts to be maintained.
ICDS also provide for certain situations that could
pre-pone the recognition and taxability of income. For instance, ICDS provide
for recognition of Government Grants in the year of receipt for tax purposes,
whereas the taxpayer (let’s call Company XYZ) can avail the option to recognize
only a portion of such income every year in its accounts on deferred income
basis. Thus, derivation of income/losses under tax and financials can get very different
due to ICDS. Also, since the normal tax provisions (and also ICDS) tend to
follow real income theory, the aforesaid ‘notional items’ which would reflect
in IGAAP and plentiful in IND-AS Accounts (of both income and expense) may have
to be disregarded in tax. Thus, by implication of ICDS and normal provisions on
IGAAP or IND-AS financials, it may so happen that the profits / losses reflected
in financials differ substantially from the taxable income of the assessee.
Concerning the inter-play between the aforesaid and MAT
provisions, the profits / losses reflected in IND-AS or IGAAP financials will
have to be adjusted as per section 115JB of the Act and higher of the taxes (as
determined under normal provisions r/w ICDS and section 115JB of the Act) will
have to be paid. For the purposes of MAT derivation, section 115JB of the Act
remain a self-sustained code and there is no implication of ICDS or any other
guideline thereon. As far as the IGAAP financials are concerned, the existing
provisions of section 115JB of the Act Explanation 1 will continue to apply
like in the past.
In respect of applicability of MAT on IND-AS
financials, vide Finance Act, 2017 sub-section(s)
2A, 2B & 2C and CBDT Notification[6],
provisions have been incorporated into the Act for governing the tax treatment
of different items appearing in Ind-AS financials. As per the newly inserted provisions, for a
Company whose financial statements are drawn up as per IND-AS, the ‘book
profits’ reflected in financials need to be further adjusted in prescribed
manner i.e.
a)
increased
by (i) amount(s) credited to other comprehensive income in financials under the
head ‘items that will not be re-classified to profit or loss’; and (ii) amounts
debited to profit & loss account on distribution of non-cash assets to
shareholders in a demerger as per IND-AS 10;
b)
reduced
by (i) amount(s) debited to other comprehensive income in financials under the
head ‘items that will not be re-classified to profit or loss’ and (ii) amounts credited
to profit & loss account on distribution of non-cash assets to shareholders
in a demerger as per IND-AS 10;
The above
shall not be applicable to the amounts credited / debited in respect of asset’s
revaluation surplus as per IND-AS 16 or gains / losses from investment in
equity instruments designated at fair value as per IND-AS 109.
An
example of the above-mentioned item of ‘other comprehensive income under the
head ‘items that will not be re-classified to profit or loss’’ could be of
value of actuarial gain / loss that is included in other comprehensive income
but will not be re-classified to profit or loss a/c. There are certain items
such as hedging reserves which are included in other comprehensive income but
get classified to profit or loss a/c subsequently (at the time of actual
settlement of transaction).
In
respect of the book profit of the year of convergence and each of the following
four years, it shall be increased / reduced by 1/5th of the ‘transition amount’. The term ‘transition amount’ is defined to
mean the amount or the aggregate of the amounts adjusted in other equity
(excluding capital reserve, and securities premium reserve) on the convergence
date but excluding few specified items such as – (i) revaluation surplus for
assets as per IND-AS 38; (ii) gains / losses from investment in equity
instruments designated at fair value as per IND-AS 109; (iii) adjustments on
property, plant and intangible assets recorded at fair value as deemed cost as
per IND-AS 101; (iv) amounts adjusted in other comprehensive income on
convergence date which shall be subsequently reclassified to profit and loss
a/c and (v) others specified.
By virtue
of the above, the MAT provisions have been amended as a result of which it will
imply on several IND-AS related adjustments. Firstly, the book profits which
are derived as per IND-AS will form the basis of MAT computation. Such book
profits can include several items such as of ‘capital’ / ‘notional’ nature. Subsequently,
it need to be adjusted in the prescribed manner to increase / reduce the book
profits with items of other comprehensive income and others. Furthermore, it
require increase / reduction by 1/5th of the transition amount
(comprising of several specified items).
The
above-mentioned application of (different) tax provisions & accounting
norms at the same time require an effective and clear inter-linkage(s) and reconciliation
between financials and tax (though it may not be required to maintain separate
books for tax purposes). The Accountants, Auditors, Tax Advisors and even
Assessing Officers will have to start performing business as usual on the new
(and translated) accounts from IGAAP to IND-AS and must comprehend with
intricacies involved in it. It would add to complexity & may also lead to several
untested positions.
By
implication of different tax provisions (normal and MAT), it may happen that
under normal provisions, the items of notional or capital nature reflected in
accounts are clearly dis-regarded in computation of taxable income, however for
MAT purposes, the so called notional items continue to be included in ‘book
profits’. Whether items of ‘capital’ nature can be included in book profits or
not remain debatable. The above could also lead to a situation wherein a
taxpayer could be doubly taxed on the same income / receipt. In our aforesaid
example involving Company XYZ, it may happen that while the Company spread over
such income over years proportionately in its accounts, it however, pays tax on
Government Grants in first year (of receipt) itself (as per normal tax provisions
and ICDS). However, it can happen that in subsequent year(s), on the proportionate
amount of same income reflected in its financials, the same Company would have
to pay MAT thereon again. Thereby, the tax ‘Mix’ could become a tax ‘Fix’.
The Hon’ble
Authorities have made several attempts to bring in (much needed) clarity on the
subject matter. However, the positions emerging through inter-play of several
accounting and tax norms are likely to remain vague for the time being and would
open up several unique and untested positions. The aforesaid is a reality now
and it will require a highly proactive approach to comprehend and deal with it effectively.
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