 "Assess MAT impact before adopting Ind-AS: Sai Venkateshwaran")
Minimum Alternate Tax (MAT) could raise its head as companies move to Ind-AS, the new International Financial Reporting Standards (IFRS)-compliant Indian accounting standard. Sai Venkateshwaran, Partner - Advisory and India Head - Accounting Advisory Services at KPMG in India, tells Sudipto Dey how businesses should deal with the situation. Edited excerpts:
What are the challenges for companies as they switch to Ind-AS?
Historically, companies have computed their taxable income for the year using profit as per financial statements as the starting point, and making additions or deductions, as required by the provisions of the Income Tax Act. However, with the notification of Indian Accounting Standards (Ind-AS), which can be voluntarily adopted from April 1, 2015, there are two accounting frameworks that now co-exist in India. Most companies follow the existing Indian Generally Accepted Accounting Principles (GAAP), while certain other companies will be following Ind-AS. As a result there would be no level playing field from a tax perspective, as the accounting income under these two frameworks could be very different. This was particularly a concern for companies moving to Ind-AS. The increased use of fair values in Ind-AS would bring in more items of unrealised fair value gains or losses in their accounting income.
How should companies deal with the differences that have cropped up between taxable income and the accounting income?
With the adoption of ICDS, there is a new framework that companies will need to follow, in addition to the standards used for financial reporting. Companies need to assess how these new standards will impact their taxable income. This needs to be done immediately, as it may impact their advance tax payments that are due in June 2015. Further, while these standards are developed using the existing Indian GAAP standards as a base, the differences are quite significant when compared to Ind-AS. Therefore, companies would need to deal with all the challenges that are associated with dual-GAAP reporting.
Are there any inconsistencies between provisions of the Income-Tax Act and the ICDS?
While developing these standards, CBDT has excluded standards relating to areas where there is specific guidance under I-T law, such as mergers and acquisitions. Further, the ICDS expressly states that if there are areas of conflict between the ICDS and the income tax law, then the latter will prevail. However, it still needs to be seen how judicial pronouncements that may be at conflict with the ICDS requirements are finally dealt with.
Is there an element of MAT overhang for Ind-AS users?
MAT is calculated using the book profits as a base, which is determined using net profit as per financial statements as adjusted for certain specified items. These adjustments have been written keeping in mind the accounting requirements and practices under existing Indian GAAP. However, as companies adopt Ind-AS, the net profit as per their financial statements could be very different to what was reported earlier under the old accounting standards, and would pose some practical challenges. CBDT needs to state what additional adjustments may be required to determine book profits for companies that report net profits as per Ind-AS. For instance, with the extensive use of fair values in Ind-AS, several items of expenses and income would now be recorded at significantly different values, with a corresponding impact on net profit. Several of these items, which are not realised incomes or expenses, may also reverse out in subsequent periods.
CBDT should provide for further adjustments to be considered in determining MAT, to neutralise the impact of transition to Ind-AS.
How should companies deal with the situation in the meanwhile?
As companies assess the impact of transition to Ind-AS, they will also need to specifically assess how some of these accounting changes will impact their MAT calculations. Till the time CBDT comes out with the revised formula they should assess this based on the existing income tax law. This issue is more pressing for companies that are considering early adoption of Ind-AS from the current year. Such companies may be forced to pay MAT based on the existing formula for determination of book profit, which may result in higher tax payment on account of MAT.
What are the challenges for companies as they switch to Ind-AS?
Historically, companies have computed their taxable income for the year using profit as per financial statements as the starting point, and making additions or deductions, as required by the provisions of the Income Tax Act. However, with the notification of Indian Accounting Standards (Ind-AS), which can be voluntarily adopted from April 1, 2015, there are two accounting frameworks that now co-exist in India. Most companies follow the existing Indian Generally Accepted Accounting Principles (GAAP), while certain other companies will be following Ind-AS. As a result there would be no level playing field from a tax perspective, as the accounting income under these two frameworks could be very different. This was particularly a concern for companies moving to Ind-AS. The increased use of fair values in Ind-AS would bring in more items of unrealised fair value gains or losses in their accounting income.
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Therefore, in order to provide a uniform basis for computation of taxable income, the Central Board of Direct Taxes (CBDT) has notified Income Computation and Disclosure Standards (ICDS). Under this new framework, each company, irrespective of the accounting framework followed by them, will use ICDS for computing their taxable income.
How should companies deal with the differences that have cropped up between taxable income and the accounting income?
With the adoption of ICDS, there is a new framework that companies will need to follow, in addition to the standards used for financial reporting. Companies need to assess how these new standards will impact their taxable income. This needs to be done immediately, as it may impact their advance tax payments that are due in June 2015. Further, while these standards are developed using the existing Indian GAAP standards as a base, the differences are quite significant when compared to Ind-AS. Therefore, companies would need to deal with all the challenges that are associated with dual-GAAP reporting.
Are there any inconsistencies between provisions of the Income-Tax Act and the ICDS?
While developing these standards, CBDT has excluded standards relating to areas where there is specific guidance under I-T law, such as mergers and acquisitions. Further, the ICDS expressly states that if there are areas of conflict between the ICDS and the income tax law, then the latter will prevail. However, it still needs to be seen how judicial pronouncements that may be at conflict with the ICDS requirements are finally dealt with.
Is there an element of MAT overhang for Ind-AS users?
MAT is calculated using the book profits as a base, which is determined using net profit as per financial statements as adjusted for certain specified items. These adjustments have been written keeping in mind the accounting requirements and practices under existing Indian GAAP. However, as companies adopt Ind-AS, the net profit as per their financial statements could be very different to what was reported earlier under the old accounting standards, and would pose some practical challenges. CBDT needs to state what additional adjustments may be required to determine book profits for companies that report net profits as per Ind-AS. For instance, with the extensive use of fair values in Ind-AS, several items of expenses and income would now be recorded at significantly different values, with a corresponding impact on net profit. Several of these items, which are not realised incomes or expenses, may also reverse out in subsequent periods.
CBDT should provide for further adjustments to be considered in determining MAT, to neutralise the impact of transition to Ind-AS.
How should companies deal with the situation in the meanwhile?
As companies assess the impact of transition to Ind-AS, they will also need to specifically assess how some of these accounting changes will impact their MAT calculations. Till the time CBDT comes out with the revised formula they should assess this based on the existing income tax law. This issue is more pressing for companies that are considering early adoption of Ind-AS from the current year. Such companies may be forced to pay MAT based on the existing formula for determination of book profit, which may result in higher tax payment on account of MAT.