Sandeep Dasgupta & Risha Gandhi

IFRS adoption in India:

With globalization of businesses and imminently increasing need for transparent, comparable financial information across markets, the International Accounting Standards Board (IASB) embarked on developing, a single set of high quality, understandable and enforceable global accounting standards or International Financial Reporting Standards (IFRS) that require transparent and comparable information to be captured in general purpose financial statements and other financial reports to help stakeholders and participants in the various global capital markets to make economic decisions. Prior to the IASB and before the dawn of globalization, the International Accounting Standards Committee (IASC) formed by professional accounting bodies of certain nations, aimed at promoting best practices in financial reporting while allowing different treatments for the same set of transactions and events.

India as a part of the G20 nations was committed to set IFRS as single set of global accounting standards. Hence Indian Accounting Standards (‘Ind AS’) were introduced by the Ministry of Corporate Affairs (MCA) during early 2015 with an intention to align the accounting principles under the Indian Generally Acceptable Accounting Principle (IGAAP) with the International Financial Reporting Standards (IFRS). Ind AS is therefore also known as Converged IFRS. Based on the recommendations of the National Advisory Committee on Accounting Standards (NACAS), the MCA mandated Ind AS compliance w.e.f 1 April 2016 for all the companies (i.e. listed and unlisted) having net worth of INR 500 crore. These standards shall become applicable to private companies having net worth less than 250 crores from 1 April 2017. Hence two financial reporting frameworks Ind AS and IGAAP currently co-exist in India.

Very broadly, reporting under IndAS (or IndAS) is based on the fundamental principles of time value of money, fair value and substance over form while the traditional IGAAP standards have been based on matching concept. The differences in the fundamental principles make the transition of IGAAP to IndAS important and also a subject matter of research.

Statement of profitability under the IndAS:

To understand the tax implications resulting from Ind AS reporting and especially the impact on the computation of MAT as a result of Ind AS adjustments, it may be useful to broadly understand the structure of the statement of profitability under the Ind AS reporting framework. As per Ind AS reporting framework, the profitability of a reporting entity hitherto reflected by the  the Statement of Profit or Loss (P&L) will be prepared in two parts- 1- Statement of ‘Profit or loss’ and 2- Statement other comprehensive income’ (OCI).  IAS 1, (on Presentation of Financial Statements), defines profit or loss as ‘the total of income less expenses, excluding the components of other comprehensive income’. Other comprehensive income (OCI) is defined as comprising ‘items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs’. Therefore, conceptually, the Profit or Loss account typically includes items which will reflect the return an entity has made on its economic resources in a period. Accordingly, the Profit / Loss account should recognise the results of transactions, utlisation and resultant impairments of assets and discharge of liabilities in the period in which they occur. In addition, the Profit / Loss account also recognises changes in the cost of assets and liabilities as well as any gains or losses resulting from their initial recognition.  The Statement of OCI only supplements the Profit / Loss account by including these non-transactional items of income and expenses, not included in the Profit/Loss account.

In light of the above basic background, this ensuing article seeks to provide a glimpse of the additional clarifications by the CBDT on computation of Minimum Alternative Tax (MAT) on book profits of companies governed by the Ind AS framework, through Circular 24/2017 dated July 25, 2017.

MAT computation on the basis of IndAS adjustments – tracking the course

Minimum Alternative Tax (MAT) is computed on book profits of companies in accordance with section 115 JB of the Income Tax Act 1961 (the Act). As per section 115JB, a company is required to prepare P&L as per Companies Act, 2013 i.e. as per Schedule III read with the applicable accounting standards.

A Committee on IndAS MAT was constituted during 2015 to suggest for a framework for computation of MAT on the basis of Ind AS basis book profits. The Committee submitted it’s report on 22nd December 2016 recommending the manner of computation of MAT. On February 1, 2017, the Finance Bill tabled before the Parliament the key proposals for computation of book profits for the purpose of MAT in case of Ind AS compliant companies. Following three key fundamental concepts were laid by the Finance Bill which became effective from April 01, 2017, in this regard:

1. The Transition Date

2. The Transition Amount and

3. The computation formulae for MAT in case of Ind AS compliant companies

The transition date was notified to be 1 April 2015. The transition amount was defined to mean the amount or aggregate of the amount adjusted in other equity (excluding capital reserve and securities premium reserve) as on the date of adoption of IndAS minus certain specified exclusions. The computation formulae basically provided for the starting point of the computing book profits being net profit before other comprehensive income and two types of additional adjustments – 1. Adjustments for the first time adoption and 2 Annual adjustments in relation to IndAS. Newly inserted sub-sections 2A, 2B and 2C after sub-section 2 of section 115 JB of the Act essentially provide for the Ind AS adjustment induced MAT computation mechanism. It may be pertinent to note the simple flow of comp

In relation to the above, the CBDT received queries / requests for clarification for computation of MAT and in response thereto issued clarifications by way of a FAQ on 25 July 2017.

Broad overview of the Ind AS MAT computation FAQs issued by the CBDT:

The following pointers attempt to summarize the aforesaid FAQs:

1. The starting point / item for computing MAT shall be the profit / loss before OCI item number XIII in Part 2 (Statement of Profit / Loss) of Division II of Schedule III to Companies Act 2013 and not the Total Comprehensive Income (Profit and Loss + OCI) item number XIV in Part 2 (Statement of Profit / Loss) of Division II of Schedule III to Companies Act 2013.

2. The appropriate manner to compute the transition amount as on the convergence date as per the explanation to section 115 JB(2C) would be to consider the first time adoption adjustment amount as at the start of the first IndAS reporting year. For instance, if a company follows IndAS reporting from financial year 2016-17, the adjustment amount as on the close of 31stMarch 2016 shall be treated as relevant as on the convergence date.

3. With respect to companies having accounting periods different from those ending on 31stMarch, it is clarified that in light of the specific provision under section 115 JB (2), such companies will have to prepare accounts for the purpose of MAT, under Indian GAAP for the pre-convergence period and under IndAS for the balance period. For instance, in case of companies having calendar year as their accounting year, will have to prepare accounts from April to December under Indian GAAP and under IndAS for the period January to March.

4. For the purpose of computation of lower of brought forward loss or unabsorbed depreciation as per books in accordance with section 115 JB (2)(iii), while transitioning into IndAS as on the convergence date, if any amount of brought forward loss or unabsorbed depreciation is wiped out due to the first time IndAS adoption adjustments, then for financial year 2017-18 only, the balance as per Indian GAAP as on the convergence date shall be considered. From financial year 2018-19, the balance of losses as per IndAS shall be considered.

5. For the purpose of computation of revaluation amount of plant, property or equipment (PPE), which should be added to or reduced from the book profit in accordance with the provision under section 115JB(  ), such amount should be after consideration of the depreciation on the revalued PPE.

6. The following items will not require adjustments to the transition amount or the books profits during IndAS regime:

a. Mark to Market losses will not require any adjustments, if corresponding gains were routed through Fair Value reporting through Profit & Loss Account (FVTPL Account).

b. Mark to Market losses will require any adjustments, if corresponding gains were not routed through Fair Value reporting through Profit & Loss Account (FVTPL Account) or are accounted through the OCI.

c. Reversal of proposed dividends including dividend distribution tax (DDT) from the year it pertains to the year in which dividend is declared as per the IndAS, will not be considered for computing the transition amount.

d. Similarly, deferred tax adjustments will also not be considered for computing the transition amount.

e. For computing the transition amount, adjustments on account of bad and doubtful debts being provision for diminution in the value of the debtors (asset) shall not be considered. However, it may be noted that MTM gains or losses in relation to such assets if forming part of FVTPL financial instruments will require consideration for computing transition amount.

f. Capital reserves or securities premium reserves existing as on the convergence date and reclassified as retained earnings on account of IndAS or share application money pending allotment reclassified as “other equity” on the transition date should not be considered for the purpose of computing transition amount.

7. The following items will require adjustments to the transition amount or book profits:

a. Since preference shares are considered to be a form of liability under IndAS and not a form of capital, the corresponding dividends are required to be debited to the Profit & Loss Account as interest cost, transition amounts should be increased by such interest expense, whether classified as dividend or interest including the dividend distribution tax.

b. The transition amount should also include any equity component in the convertible debentures (viz. NCDs) and interest free loans, since as per IndAS reporting, such convertible instruments or loans comprise of an equity element.

It is important to note that while framing accounting policies for IndAS, both for First Time Adoption adjustments and post IndAS implementation ongoing adjustments, an evaluation of implications of such policy on MAT is an important consideration. For instance, the evaluation of MAT impact of fair value accounting in case of PPE, investments in subsidiaries, joint ventures, business combinations etc. are important considerations for businesses for selecting accounting policies. In the backdrop of the Finance Bill 2017 providing certain much needed clarification on MAT computation and associated CBDT clarifications are welcome moves.

While the IndAS adjustments proposed under IndAS 101 envisage smooth transition from Indian GAAP to IndAS financial statements, the attempt of the Government to simplify the computation of book profits for the purpose of Minimum Alternate Tax in response to representations and suggestions by various stakeholders, is noteworthy.

One would recall the hype around propositions on abolition of MAT for all taxpayers (similar to FIIs) and even that of tax accounting standards (ICDS) towards the objective of income tax law simplification. However, with the IFRS converged accounting standards now a reality in India, simultaneous alignment of interpretation of the new accounting standards with tax provisions and tax accounting standards by the Government are steps adopted in the right direction towards much wanted clarity.

In order to minimize tax disputes emanating on this count, one can expect more clarifications by the Government, in course of greater adoption of IndAS by businesses and eventual fate of tax assessments on this count. As an instance, in the context of corporate reorganizations by way of demergers, which there is adequate certainty now that MAT exposure shall not lie in case of profit accounted as per Ind AS on distribution of assets to shareholders at fair value in a scheme of demerger, the Government may do well to clarify that this fair value accounting should not be treated to be in conflict with the tax neutrality condition of the demerger definition under the Act, which requires the transferor company to record the net assets at book value.

(The authors are Sandeep Dasgupta (Senior Manager) and Risha Gandhi (Deputy Manager) from Deloitte Haskins & Sells LLP. Views expressed above are personal and not that of the firm)

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December 2022