1. Background
With companies having net worth exceeding INR 500 crores required to converge their financials with the Indian Accounting Standards (IND AS) for financial years beginning on or after 1 April, 2016, the Minimum Alternate Tax (MAT) implications for section 115JB of the Income Tax Act, 1961 (ITA) were a big mystery. The Finance Act, 2017, has tried to address the uncertainties around it by suitably amending section 115JB of the ITA. In this article, we shall take a micro-level look at the MAT implications on companies under the IND AS, as governed by section 115JB(2A).
2. First time adoption- IND AS adjustments
| # | Accounting treatment provided on the transition date | Implications under MAT |
| 1 | Adjustments made in Other Comprehensive Income (OCI) capable of being reclassified to the statement of profit and loss. | To be included in book profits when the amount is reclassified to the statement of profit and loss. |
| 2 | (a) Revaluation surplus for assets, as per IND AS 16 and IND AS 38.
(b) Gains or losses from investments in equity instruments stated at fair value through OCI as per IND AS 109. (c) Adjustments relating to items of Property, Plant and Equipment (PPE) and intangible assets recorded at fair value as deemed cost in accordance with IND AS 101. (d) Adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with IND AS 101. (e) Adjustments relating to cumulative translation differences of a foreign operation in accordance with IND AS 101. |
To be increased/ decreased from book profits of the year in which the asset is retired, disposed, realised or otherwise transferred. |
| 3 | Adjustments made in other equity, excluding capital reserve and securities premium reserve, other than the above-mentioned adjustments. |
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3. MAT impact on OCI adjustments
Ind AS compliant companies are required to bifurcate their profit and loss account into two parts: Net profit or loss for the year and Net Other Comprehensive income (OCI). Therefore, a question arises as to whether amounts debited or credited to OCI would form part of book profits for MAT purposes.
The Finance Act, 2017, has provided that book profits will be increased or decreased by the amounts credited or debited to OCI and that fall under “Items that will not be reclassified to profit or loss.”
However, the above rule does not apply to adjustments to OCI on account of the following:
- Revaluation surplus arising on revaluation of property, plant and equipment, in accordance with IND AS 16.
- Revaluation surplus arising on revaluation of intangible assets, as per IND AS 38.
- Gains or losses from investments in equity instruments designated at fair value through OCI, in accordance with IND AS 109.
Instead, these adjustments to OCI will be considered while computing the book profits of the year in which the asset is retired, disposed, realised or otherwise transferred.
The above treatment is in line with the recommendations of the MAT- IND AS Committee.[2]
This would ensure no upfront levy of MAT on corporates at point zero, and simultaneously, safeguarding of the exchequer’s interest by specifically stating the timing when such items would be chargeable under MAT.
4. MAT impact in a demerger
Amounts debited or credited to the statement of profit and loss on distribution of non-cash assets to the shareholders in a demerger, in accordance with Appendix A of the IND AS 10, shall not be considered while computing the book profits.
Further, if the resulting company records the property and the liabilities of the undertaking received pursuant to the demerger at values different from those appearing in the books of the demerged company immediately before the demerger, any change in such value shall be ignored for computing the book profits of such resulting company. This would require companies receiving assets pursuant to a demerger to maintain two separate sets of accounts, thereby increasing compliance requirements.
5. Conclusion
- Although increasing the opening IND AS adjustments from three years (as suggested by the MAT- IND AS Committee) to five years is a welcome move, it seeks to tax notional income, which is inconsistent with the real income theory and would create unwarranted tax burden for IND AS compliant companies. This may require companies to evaluate the impact of their first-time adoption choices for such items carefully.
- In the context of fixed assets and intangibles, the recommendation is to simplify the impact by ignoring the impact of transition revaluation adjustments for MAT purposes will, of course, require companies to track these adjustments in the future, until the end of the estimated useful lives of the underlying assets.
- Taxing cumulative translation differences under MAT in foreign operations at disposal seems to be a fair trade off, which keeps interests of all stakeholders in mind. Incidence of tax on corporates would arise only on actual disposal, whereas this also safeguards the interest of the Revenue.
- Disregarding the value of assets and liabilities recorded by the resulting company in a demerger would increase the tax burden on the resulting company. It would be denied depreciation on the value at which it has actually acquired the assets.
The views expressed in this article are personal.
This article includes inputs from Akshay Shenoy, Associate Director M&A Tax PwC India, Manish Gupta, Assistant Manager M&A Tax, PwC India and Vivek Gaggar, Associate, M&A Tax, PwC India.
About the author:
This article has been authored by Falguni Shah, Partner, Mergers & Acquisition Tax, PwC India.
Falguni has been advising clients on structuring mergers and acquisitions, and cross-border transactions for over 15 years. She has extensive experience in advising them on complex corporate restructuring in domestic and cross-border transactions.
[1] Report of MAT- IND AS Committee dated 23rd July, 2016
[2] Report of MAT- IND AS Committee dated 18 March, 2016 and 23 July, 2016
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