Budget 2017: MAT provisions being aligned with Ind AS requirements

Sai VenkateshwaranThe Finance Bill has proposed amendments to Section 115JB relating to computation of book profit for the levy of Minimum Alternate Tax (MAT), recognising the fact that most large companies in India have now transitioned to reporting under the new Indian Accounting Standards (Ind AS) from the current year.  These amendments have been long awaited as all large companies are already live with their Ind AS reporting and will be finalizing their first Ind AS accounts by the end of this quarter.  This is a welcome development and provides the much needed clarity to companies on the MAT implications of the transition to Ind AS.  Base principle of horizontal equityThe memorandum to the Finance Bill recognizes the need for horizontal equity across companies irrespective of the fact that whether they follow Ind AS or the existing Indian GAAP, and states that the government has issued Income Computation and Disclosure Standards (ICDS) for computation of taxable income for specified heads of income to achieve this objective.  However, the same objective of maintaining horizontal equity is not being met as far as computation of MAT is concerned.  Based on these amendments, MAT will be calculated using the profits as per the statement of profit and loss (P&L account) as per Ind AS as the starting point and only making further adjustments for (i) gains and losses recognised in the P&L on accounting for demergers, (ii) fair value and other gains and losses that are recorded outside the P&L, ie, directly in other comprehensive income or relating to adjustments made to the opening reserves on transition to Ind AS.  Considering that Ind AS requires significant use of fair values, this would mean that several potentially large items of gains and losses that are recognized in the P&L would now be considered for MAT calculations, thereby impacting cash outflows relating to MAT even though the related gain or loss may still be unrealised or notional and that could potentially reverse in subsequent periods.  This anomaly is primarily due to the lack of horizontal equity on the dividend distribution provisions, where a company can distribute dividend out of its current profits, even if such profits are unrealised or notional, etc., and the tax authorities believe that profit that can distributed should also be subject to MAT.  Therefore, till the time the dividend distribution norms are not aligned, this issue will remain.  Adjustments on transition to Ind ASOn transition to the Ind AS standards, companies are required to retrospectively make certain adjustments to the way certain assets, liabilities, income and expenses are recorded, and are allowed certain one-time exemptions and adjustments to ease the transition, and all of these are adjusted to the opening reserves on the date of transition.  The proposed amendments provide a framework for considering these adjustments for the purposes of computation of MAT.  Barring those adjustments that will subsequently be reclassified to P&L and those relating to fair valuing fixed assets or certain investments, most of the other adjustments made to the reserves would be added to book profits equally over a five year period from the year of transition.  For this purpose, the cumulative adjustments to opening reserves of the first Ind AS reporting period would be considered. Impact of demergers on MAT computationsUnder Ind AS, when there is a demerger, resulting in a non-cash distribution to shareholders, the difference between the fair value and the costs of those assets is required to be recognized as a gain/loss in the P&L and the distribution to shareholders is then reflected at the fair value of these assets.  These amendments essentially provide that such gains/losses are to be excluded in the computation of book profit, so that the demerger still remains tax neutral even from a MAT perspective.  However, a related challenge that arises is that the resultant company, ie, entity into which such assets/business is transferred to, for the computation of book profits for MAT, would have to use the book values of the demerged company, rather than its own book values.  This would require such entity to maintain parallel records for as long as there are differences between the values as per these two sets of records. Effective dateInd AS has become mandatory for certain classes of companies from 1 April 2016, and companies were allowed to voluntarily adopt these standards from 1 April 2015.  While vast majority of companies have adopted these standards only from 1 April 2016, there are a few companies that have voluntarily transitioned a year in advance.  As per the memorandum to the Finance Bill, these amendments will be applicable from 1 April 2017, and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years.  Therefore clarity will be required for companies that voluntarily early adopted these standards and transitioned from 1 April 2015, specifically on how MAT will need to be computed, in particular for assessment year 2016-17 and in relation to opening adjustments.  In balance, these amendments recognise the complexities associated with the transition to Ind AS and reflect a practical approach in managing this change, and provides clarity to companies so that they can take informed decisions and finalise their policies for transition to Ind AS after considering the potential tax implications.  The author is Partner and Head – Accounting Advisory Services, KPMG in India