New Ac­count­ing Norms May Push Up Tax Li­a­bil­i­ties of Cos by 20%

Fair value ac­count­ing of fi­nan­cial in­stru­ments un­der Ind-AS may lead to MAT levy on cos, say ex­perts

The Economic Times - - Companies - Sachin.Dave@ times­group.com

Mum­bai: In­dian com­pa­nies that have moved to the new ac­count­ing stan­dards for the June quar­ter could be star­ing at an in­creased tax li­a­bil­ity of about 20% un­der min­i­mum al­ter­nate tax, or MAT.

Due to the way ac­count­ing is done un­der the new stan­dards, Ind-AS, many trans­ac­tions in­volv­ing for­eign ex­change, se­cu­ri­ties and equity apart from cer­tain de­merg­ers could start at­tract­ing MAT, in­dus­try track­ers said.

In­dia has changed its ac­count­ing stan­dards from GAAP to Ind-AS, which is on par with In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dards (IFRS), from April 1 this year.

All com­pa­nies with a to­tal net worth of .₹ 500 crore or above are now fol­low­ing Ind-AS. So while the fi­nan­cials of com­pa­nies re­main the same, the way they are cal­cu­lated is now dif­fer­ent, im­pact­ing the firms’ prof­its, good­will, net worth, and, in some cases, even mar­ket cap­i­tal­i­sa­tion.

The core of the prob­lem is fair value ac­count­ing.

Un­der the old ac­count­ing stan­dards, com­pa­nies would take in to ac­count the cost price of cer­tain as­sets, in­clud­ing for­eign ex­change, se­cu­ri­ties, deben­tures or shares they hold. How­ever, Ind-AS re­quires that the com­pa­nies record the fair value or the mar­ket value of these fi­nan­cial in­stru­ments. If the val­u­a­tion of these in­stru­ments in­creases — which is ex­pected in most cases — this would boost the book profit, and hence MAT could be im­posed on that, say an­a­lysts.

“As the law stands to­day, com­pa­nies that carry as­sets or li­a­bil­i­ties, such fi­nan­cial in­stru­ments, in­clud­ing shares, de­riv­a­tives or other in­vest­ments, could see changes in fair val­ues of these in­stru­ments be­ing routed through the P&L, which, in turn, may trig­ger a MAT im­pact in the June quar­ter,” said Sai Venkatesh­waran, part­ner and head of ac­count­ing ad­vi­sory ser­vices at KPMG in In­dia. “For in­stance, sec­tors where com­pa­nies have large for­eign cur­rency ex­po­sure typ­i­cally have con­tracts that need to be fair val­ued, and will see an im­pact,” he said.

Sandip Khetan, part­ner at SR Batli­boi, a mem­ber firm of EY Global, said: “For many com­pa­nies, there would be a MAT li­a­bil­ity in the cur­rent fi­nan­cial year due to the fair value ac­count­ing changes mainly around in­vest­ments in equity and other se­cu­ri­ties. Ad­di­tion­ally, com­pa­nies will be re­quired to record sev­eral items of no­tional gains which could po­ten­tially re­sult into in­crease in book prof­its and a re­sul­tant MAT out­flow.”

This would also mean that in­ter­est­free loans which one group com­pany of­fers to another could be treated as a gain (although no­tional), and it could be ac­counted for and come un­der the

Tax­ing Times

The po­ten­tial price of a good, ser­vice, asset or se­cu­rity

MAT

The min­i­mum al­ter­nate tax levied at 20% on book profit of com­pa­nies

purview of tax­a­tion.

In­dus­try track­ers ex­pect the Cen­tral Board of Di­rect Taxes (CBDT) to clar­ify how the tax de­part­ment would ap­ply MAT on these trans­ac­tions in the com­ing month.

A tax of­fi­cial in Mum­bai said: “We are look­ing at how this (Ind-AS) could af­fect tax­a­tion.” The of­fi­cial re­fused to clar­ify if this could im­pact MAT levy on the com­pa­nies in the fu­ture.

In­dus­try track­ers said com­pa­nies in tech, man­u­fac­tur­ing, IT/ITES, pharmaceuticals, real es­tate and in­fra­struc­ture could be most im­pacted.

Some of these com­pa­nies are also putting aside funds for tax­a­tion. While the tax de­mands for the year could only be made much later, com­pa­nies are pre­par­ing them­selves for a tax con­tin­gency and lit­i­ga­tion in the worst case sce­nario. “We have al­ready done an im­pact

anal­y­sis of Ind-AS and MAT is one of the big­gest wor­ries,” said CFO of a listed au­to­mo­bile com­pany. “How­ever, there is noth­ing much that we see could be done at this point in time, but we hope that there is some clar­i­fi­ca­tion from the gov­ern­ment around this,” the per­son said.

In­dus­try track­ers said even de­merg­ers could at­tract tax­a­tion un­der the new ac­count­ing stan­dards. Hence, many com­pa­nies are putting their de­merger plans on hold till there is clar­ity about the reg­u­la­tions. “While de­merg­ers were con­sid­ered a tax neu­tral ac­tiv­ity till now, these will be seen as a form of dis­tri­bu­tion to share­hold­ers and recog­nised at fair val­ues un­der the new ac­count­ing stan­dards, which may re­sult in a gain recog­ni­tion in the P&L which trig­gers tax­a­tion un­der MAT,” said Venkatesh­waran of KPMG.

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